The accumulation of wealth can be the fruition of a long financial journey. Without question, when you have reached your financial goals, you have personal opportunities and a great deal of freedom. Beyond that, you have the ability to leave behind a meaningful legacy that your loved ones will be able to draw from after your passing.
You should understand all the facts when it comes to taxation if you are a high net worth individual. There is a federal estate tax that can have a heavy impact, because it carries a 40 percent top rate.
To determine your level of exposure, you can compare the value of your estate to the estate tax credit or exclusion. The exclusion is the amount that can be transferred before the estate tax would be applicable. At the time of this writing late in 2015, the exact amount of the federal estate tax exclusion stands at $5.43 million.
Each year there are adjustments to the exclusion to account for inflation, so an updated figure should be announced shortly, because the new year is approaching.
We should point out the fact that there is a gift tax that is in place to stop you from giving gifts so that you can sidestep the federal estate tax. The two taxes are unified, and the $5.43 million exclusion is a unified exclusion. It extends to gifts that you give while you are living along with the estate that will be transferred after you are gone.
Transfers to Your Spouse
This $5.43 million exclusion would be used to transfer assets tax-free to anyone, with the exception of your spouse. If you are legally married, even if it is a same-sex marriage, you can use the unlimited marital deduction to transfer any amount of property to your spouse free of the federal estate tax.
When we state that you can transfer unlimited assets to your spouse estate tax free, there is an asterisk of sorts that should follow the statement. You could do this, as long as your spouse is an American citizen. The unlimited marital deduction cannot be used by someone who is a citizen of a different country.
If you are looking for tax efficiency solution as a high net worth individual who is married to a foreign citizen, you could consider the utilization of a qualified domestic trust.
Once you convey assets into the trust, you name a trustee to administer the trust after your passing. Assuming you predecease your spouse, the earnings from the trust could be distributed to your spouse on an ongoing basis free of the estate tax. Your spouse would have income for life, but this income would be subject to regular income taxes.
A secondary beneficiary that you name in the trust declaration would assume ownership of the remainder after the death of your surviving spouse. Depending on the extent of the resources, this transfer could be subject to the estate tax.
Take the Next Step
Our firm would be glad to help if you would like to discuss your situation with a licensed professional. We offer no obligation consultations, and you can send us a message through this page to set up an appointment: Smithtown Long Island Estate Planning Attorneys.