People who are exposed to death taxes must implement estate tax efficiency strategies. This tax does not apply on asset transfers between spouses who are American citizens, but it is potentially applicable on asset transfers to others.
There is a federal estate tax exclusion that defines the amount that can be transferred before the estate tax would be applied. During the current calendar year, the federal estate tax exclusion is $5.43 million, but there are annual adjustments to account for inflation. The maximum rate of the death tax is 40 percent.
When you digest this information, you may formulate an idea: You can simply give gifts to your loved ones before you pass away to sidestep the estate tax. This was possible shortly after the enactment of the estate tax in 1916, but a gift tax was installed to close this loophole.
The gift tax and the estate tax are unified, so the $5.43 million exclusion applies to your estate, but it also applies to lifetime gifts. If you use up your exclusion giving gifts while you are living, there would be nothing left to apply to your estate after you are gone.
Annual Gift Tax Exclusion
All of the information above may sound like bad news, but there is some positive news to report as well. There is another gift tax exclusion that exists apart from the unified lifetime gift and estate tax exclusion.
The annual per person gift tax exclusion allows you to give up to $14,000 to any number of people within a calendar year free of the gift tax. If you give no more than $14,000 to any one person, the gifts can be given tax-free, and you would not be reducing your $5.43 million unified gift and estate tax exclusion.
Since this annual exclusion is afforded to each individual taxpayer, if you are married, you and your spouse would have a total of $28,000 that you could give tax-free to any number of people within a calendar year. This can give you the ability to transfer a significant amount of money tax-free over time.
To provide an example, let’s say that you have a married son. You and your spouse could give $28,000 tax-free to your son every year, and you could give the same amount to his spouse. That is $56,000 per year in tax-free asset transfers.
You could use this exclusion to give direct gifts, but the annual gift tax exclusion can also be used to fund certain types of trusts, and it could be utilized to distribute shares in a family limited partnership.
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Mark S. Eghrari, Estate Planning Attorney
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