We have a federal estate tax in the United States, but most people do not have to contend with it, because there is a relatively high credit or exclusion. This is the amount can be transferred before the estate tax would be applied. Before the beginning of this year, it was somewhere in the vicinity of $5 million. This was the figure that was installed in 2011, and there were ongoing adjustments to account for inflation.
When the new tax laws went into effect in 2018, the estate tax exclusion went up considerably. Right now, it is $11.18 million. This exclusion is allotted to each individual taxpayer, so a married couple would have a $22.36 million credit.
It is important to understand the fact that there is an unlimited marital estate tax deduction. You can transfer any amount of money or property to your spouse free of transfer taxes, as long as your spouse is an American citizen. There is an estate planning tool called a qualified domestic trust that you can use if you are married to someone that is a citizen of another country, but that is a subject for another blog post.
We should point out the fact that the estate tax exclusion is portable between spouses. This was not the case until 2011. In this context, portability refers the ability of a surviving spouse to utilize his or her deceased spouse’s exclusion.
Your first thought when you hear about the existence of the estate tax would be to resolve to give gifts to your loved ones when the time is right to sidestep the tax. This makes sense, and this is what people used to do right after the estate tax was enacted in 1916. However, enough lawmakers wanted to close this loophole, so a federal gift tax was put into place in 1924.
It was repealed two years later, but it came back for good in 1932. At the present time, the gift tax is unified with the estate tax. The $11.18 million exclusion that we have is a unified exclusion. It applies to large lifetime gifts that you give along with the value of your estate when it is being transferred to your heirs.
Additional Gift Tax Exclusions
As you can see, the existence of the gift tax prevents you from giving everything to your loved ones to avoid the estate tax. That’s the bad news, but the good news is that there are a few additional gift tax exclusion that can be used to transfer assets tax-free.
At the top of the list is the annual gift tax exclusion. This allows you to give at least $15,000 to any number of gift recipients in a given calendar year. There is no limit to the total amount that can be given tax-free, as long as you do not give more than $15,000 to any one person.
This may not sound like a lot of money if your wealth is significant enough to expose you to the estate tax. However, if you take advantage of this exclusion over an extended period of time, relatively robust savings can be realized.
This is a per person exclusion, so if you are married, you and your spouse would be able to give $30,000 to an unlimited number of different recipients tax-free every year. To explain by way of a simple example, let’s say that you have five married children. You can give $30,000 tax-free to each husband and each wife, equaling $60,000 per couple.
As a result, you are reducing your taxable estate by $300,000 each year as you transfer this amount free of taxation. If you do this for 10 years, you are looking at $3 million in tax-free asset transfers, and your estate would be trimmed down by this figure. Of course, you can extend the gift recipient list to your grandchildren or anyone else.
Under IRS regulations, you are allowed to pay school tuition for students without incurring any gift tax liability. Plus, if you want to pay medical bills for others, including health care insurance premiums, you can do this in tax-free manner.
State Level Estate Taxes
Our offices are in New York and Vermont, and there are state-level estate taxes in these states. Stay tuned to read our upcoming post that explains the details for 2019.
Download Our Estate Planning Worksheet!
We have a great resource that you should definitely take advantage of if you would like to learn more about estate planning. Our attorneys have prepared a very useful worksheet, and you can download your copy free of charge right now if you click this link and follow the simple instructions.