When you’re planning your estate you should certainly be aware of the parameters of the federal estate tax. It should be noted that there is also an estate tax on the state level here in the state of New York, but in this post we will focus on the federal estate tax parameters.
At the present time the federal estate tax exclusion is $5.25 million. If you take no steps to position your assets with tax efficiency in mind anything that you pass on to your heirs that exceeds $5.25 million would be exposed to the estate tax and its 40% maximum rate.
When you hear the above you may consider giving gifts to your loved ones while you are still alive in an effort to minimize your estate tax exposure. Unfortunately there is a gift tax in place, and it carries the same 40% maximum rate as the estate tax because the two taxes are unified.
The $5.25 million exclusion applies to gifts that you give during your life as well as your estate. If you gave $4 million in gifts using this exclusion only $1.25 million would be left to apply to your estate.
It should be noted that you can give limited tax-free gifts in a given year without using any of your unified exclusion. This figure is subject to change, but in 2013 there is a $14,000 per person annual gift tax exclusion. You can give gifts up to this amount to any number of people in 2013 free of the gift tax. These gifts are not going to reduce the amount of your available unified exclusion.
$14,000 may not sound like a lot of money to transfer tax-free when you are concerned about the estate tax. However, this is a per-person exclusion. If you are married you and your spouse could combine your respective exclusions, and as a result as a couple you could give as much as $28,000 to any number of recipients this year.
To take this a step further, let’s say that you have a married son. You and your spouse could give $28,000 in 2013 to your son and another $28,000 to his spouse. These transfers would be completely tax-free. If you were to do this over a number of years a significant amount of money could be transferred free of taxation.
While we are on the topic of spouses, there are a couple of things that you should know about the estate tax as a married individual. You can leave any amount of money to your spouse free of the estate tax because there is an unlimited marital deduction. You can also give your spouse gifts totaling any amount of money while you are still alive free of the gift tax.
In addition to the above, the estate tax in Long Island New York is portable between spouses. If you predecease your spouse, he or she will be able to utilize the estate tax exclusion that you were entitled to as well as his or her own.