The line that is drawn between those who must pay the federal estate tax and those who are exempt exists in the form of the federal estate tax exclusion. During 2014 the amount of the federal estate tax exclusion is $5.34 million. This is the amount that can be transferred before the estate tax would potentially become applicable.
A $5 million exclusion was put in place for the 2011 calendar year via legislative mandate. Each year since then there have been adjustments to account for inflation. Next year, another inflation adjustment may be applied.
The maximum rate of the federal estate tax is 40 percent at the present time.
There are states in the union that have state-level estate taxes. Our firm practices in North Dakota and Minnesota. There is no state estate tax in North Dakota, but Minnesota does have a state-level estate tax. The exclusion in 2014 is $1.2 million.
Federal Gift Tax
In addition to the estate tax, we also have a federal gift tax. The two taxes are unified.
When the estate tax was first enacted in 1916, there was no gift tax. As you might imagine, many people who were exposed to the estate tax simply gave the money away while they were still living. To close this loophole a gift tax was implemented in 1924. It was repealed in 1926, but it returned for good in 1932.
The $5.34 million exclusion applies to the taxable gifts that you give throughout your life along with the value of your estate.
Unlimited Marital Deduction
There is an unlimited marital gift and estate tax deduction. This allows you to transfer unlimited assets to your spouse free of the estate tax, as long as your spouse is an American citizen.
Leaving everything to your spouse tax-free is not necessarily a sound estate planning solution. The powers that be are not particularly concerned about the unlimited marital deduction, because your surviving spouse would be in possession of a taxable estate.
The unlimited marital deduction is not extended to non-citizen spouses because a citizen of another country could simply move back home with a tax-free inheritance in hand. Under those circumstances the Internal Revenue Service would essentially be out of luck.
It is important to keep a close eye on the federal estate tax parameters, because they are subject to change. In fact, the last two budget proposals that have been presented by the White House included changes to the estate tax exclusion and top rate.
The most recent proposal called for a $3.5 million estate tax exclusion, a $1 million gift tax exclusion, and a 45 percent maximum rate. Under that proposal, these changes would be implemented in 2018.
Wealth Preservation Consultation
If you have estate tax concerns, we can help you formulate a wealth preservation strategy. You can request a free consultation through the contact page on this website.