There is a federal estate tax in the United States, but most people do not pay the tax because of the credit or exclusion. In 2014, the amount of the federal estate tax exclusion is $5.34 million.
A tax relief act was passed back in 2010 that set the amount of the estate tax exclusion at $5 million for 2011. Since that time, the $5 million base exclusion has remained intact, but there have been ongoing adjustments to account for inflation. In 2015 another inflation adjustment may be applied.
The top rate of the federal estate tax is 40 percent.
Federal Gift Tax
In addition to the federal estate tax, there is also a federal gift tax. Because of the existence of the federal gift tax, you cannot give away assets while you are living to avoid taxation.
The $5.34 million exclusion that we are talking about is a unified exclusion. It encompasses the taxable gifts that you give while you are living and the estate that you are passing along to your heirs.
The 40 percent top rate also applies to taxable gift giving.
Unlimited Marital Deduction
The $5.34 million exclusion would be utilized to give tax-free gifts to people other than your spouse. There is an unlimited marital federal transfer tax deduction. This allows you to transfer an unlimited amount of property to your spouse free of the gift tax or the estate tax.
There is however one caveat to attach to the above statement. To utilize the unlimited marital gift and estate tax deduction, the surviving spouse must be a citizen of the United States. This deduction is not available to non-citizen spouses.
If you use the unlimited marital deduction to give a tax-free bequest to your spouse, what happens next? Your spouse would be in possession of a taxable estate. The estate tax would still be a factor.
On the other hand, if the unlimited marital deduction was available to non-citizen spouses, the IRS could be out of luck. The surviving spouse could return to his or her country of citizenship after receiving a tax-free inheritance. There would be no way for the Internal Revenue Service to collect an estate tax if the surviving spouse passed away abroad.
New York State Estate Tax
Our firm practices in theSstate of New York. Here in New York we have an estate tax on the state level. Until April 1st of next year, the amount of the New York state estate tax exclusion is $2,062,500. It will rise by $1.0625 million each year until 2017, when it matches the amount of the federal estate tax exclusion.
For the time being, you could be exempt from the federal estate tax, but exposed to the New York State estate tax. The top rate of the New York State estate tax is 16 percent.