It is fantastic to be able to achieve all of your financial goals and be in a position to pass along a meaningful legacy to your loved ones. This being stated, you do have to contend with a significant challenge when it comes to wealth preservation. There is a federal estate tax in the United States, and it can have a huge impact, because it carries a 40% maximum rate.

Before we get into the subject of gift giving, we should provide some extensive details about this death levy. Everyone does not have to pay the tax, because there is a credit or exclusion that is relatively high. This is a particular amount that can be passed along before the estate tax would be applied.

At the time of this writing in 2019, the estate tax exclusion is $11.4 million. Each year, there are adjustments to account for inflation, so you can expect to see a somewhat higher figure in 2020. And of course, it is always possible that the parameters can be completely changed via legislative mandate, so this is something to keep in mind.

There is an unlimited marital estate tax deduction. This allows spouses to transfer any amount of money between one another free of taxation, but there is one caveat to this arrangement. The unlimited marital deduction can only be used by people that are citizens of the United States.

However, there is an estate planning device called a qualified domestic trust that is often used by wealthy people that are married to individuals that are not American citizens. We will provide the details in a future blog post.

Prior to 2011, the estate tax exclusion was not portable between spouses. In this context, the term “portability” is used to describe the ability of a surviving spouse to use the exclusion that was earmarked for his or her deceased spouse.

During that year, there was a piece of tax legislation passed that made the exclusion portable. This stipulation has remained in place ever since then.

Federal Gift Tax

The federal estate tax was originally enacted in 1916, and at that time, there was no gift tax in place. As a result, people with federal estate tax responsibility did give gifts to their loved ones to sidestep the tax. The gift tax was imposed in 1924 to close this window of opportunity.

It was repealed in 1926, but the gift tax was reenacted in 1932, and it has been in a fact of life since then. The estate tax and the gift tax are unified under the tax code, so the $11.4 million exclusion is a unified gift/estate tax exclusion. It applies to large gifts that you give while you are living along with your estate.

That’s the bad news, but there is also some good news to pass along with regard to gift tax exclusions. There is an annual exclusion that allows you to give up to $15,000 to any number of gift recipients within a calendar year free of taxation.

If you are married, you and your spouse would be able to transfer $30,000 to an unlimited number of people annually. You could definitely reduce the taxable value of your estate considerably if you take advantage of this exclusion over an extended period of time. Direct gift giving is a possibility, and the annual exclusion can also be used to fund different types of trusts.

New York State Estate Tax

There is a state level estate tax in New York, and we will look at the details in an upcoming blog post. This being stated, for the purposes of our topic here, it should be noted that there is no state level gift tax in New York. As a result, you could give gifts to reduce your New York estate tax exposure.

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