The estate tax is a very significant factor for high net worth individuals. At the time of this writing in 2014, the maximum rate of the federal estate tax is 40 percent.
In light of this rate, the value of your estate that passes to your loved ones could be shaved down considerably if you do not take steps to gain estate tax efficiency.
What is the taxable portion? This would be the amount that exceeds the federal estate tax credit or exclusion. For the rest of this year, the exact amount of the federal estate tax exclusion is $5.34 million. Each year there can be adjustments to account for inflation, so the figure may be higher in 2015.
Unlimited Marital Estate Tax Deduction
The $5.34 million estate tax exclusion would be used to facilitate tax-free asset transfers to people other than your spouse. You do not have to use any of your exclusion to leave a tax-free bequest to your spouse, because there is an unlimited marital estate tax deduction.
This allows you to leave unlimited resources to your spouse tax-free, assuming your spouse is a citizen of the United States.
The tax man is not particularly concerned about the marital deduction. Let’s say that you leave $10 million to your spouse tax-free. He or she is going to be in possession of a taxable estate. The estate tax burden was delayed, but it was not eliminated.
On the other hand, suppose the unlimited marital deduction was available to non-citizen spouses. A surviving spouse could simply return to his or her country of citizenship with a tax-free inheritance. The Internal Revenue Service would never see any money, and this is why the unlimited marital deduction is not available to spouses who are not American citizens.
Federal Gift Tax
In addition to the federal estate tax, we also have a gift tax on the federal level. The gift tax is unified with the estate tax, so the $5.34 million exclusion encompasses large gifts along with the value of your estate.
The unlimited marital deduction also extends to lifetime gift giving. You can give your spouse unlimited gifts without incurring any gift tax liability.
New York State Estate Tax
We practice law in the state of New York. There is a state-level estate tax in our state. For the time being, the amount of the exclusion is lower than the federal estate tax exclusion.
Through March of next year, the New York state estate tax exclusion is $2,062,500. It is going to rise by a little over $1 million per year until it matches the amount of the federal estate tax exclusion.
There is also an unlimited marital estate tax deduction on the state level.
Schedule a Free Wealth Preservation Consultation
If you are concerned about estate taxes, our firm can help. We offer free consultations, and you can request an appointment through this link: Finger Lakes NY Estate Planning.
Michael Robinson, Estate Planning Attorney
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