The estate tax can be a huge factor to take into consideration if you have enjoyed a considerable level of financial success. This tax carries a 40 percent maximum rate, so we are talking about a very significant level of asset erosion.
Most people in the United States are not faced with estate tax exposure, because there is a credit or exclusion that is relatively high. In 2014, the amount of this exclusion is $5.34 million. This is the amount that you can transfer tax-free.
If you are transferring more than $5.34 million to people other than your spouse, you should take steps to gain estate tax efficiency.
Unlimited Marital Estate Tax Deduction
There is an unlimited marital estate tax deduction. If you are legally married in the eyes of the law, you can transfer unlimited assets to your spouse free of taxation.
However, to utilize the unlimited marital estate tax deduction, your spouse must be a citizen of the United States. This stipulation is in place because the tax man wants to get some money eventually.
If you left everything to your spouse tax-free, he or she would be in possession of a taxable estate, so the tax would still be looming. This is why the powers that be are not too concerned about the marital deduction.
On the other hand, if a non-citizen spouse could use this deduction, the surviving spouse could return to his or her country of citizenship with a tax-free inheritance in hand. The IRS would not be able to impose a tax after the death of the surviving spouse, and this is why foreign citizens cannot utilize the unlimited marital deduction.
In addition to the estate tax, there is also a federal gift tax. The gift tax and the estate tax are unified, so the $5.34 million exclusion applies to taxable gifts that you give while you are living along with the value of your estate.
In other words, if you give $5.34 million in tax-free gifts while you are alive, there would be nothing left to apply to your estate after you die. The entirety of your estate would be subject to the estate tax.
The unlimited marital deduction also extends to lifetime gift giving. You can give your spouse any amount of money and/or property while you are alive without incurring any gift tax exposure.
Learn More About the Estate Tax
If you would like to obtain some in-depth information about the federal estate tax, we have a fantastic resource that will provide you with a solid foundation.
We have prepared a detailed report that puts the federal estate tax under the microscope. The report is being offered free of charge at the present time, and you can access your copy through this link: Free Estate Tax Report.
Joe Masiuk, Estate Planning Attorney
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