The federal estate tax exclusion is the amount that can be transferred before the estate tax would be applicable. Only the portion of an estate that exceeds this exclusion would be subject to taxation.
This blog post is being written late in 2015. For the rest of this year, the exact amount of the federal estate tax exclusion is $5.43 million. Each year, the IRS can adjust the exclusion to account for inflation. The adjustment for 2016 has recently been announced. Next year, the exclusion will go up by $20,000 to $5.45 million.
In addition to the federal estate tax, there is also a gift tax. The gift tax is in place to prevent people from giving gifts to avoid the estate tax. Since 1976, the gift tax has been unified with the estate tax. This means that the $5.45 million exclusion that we will have in 2016 is a unified exclusion that applies to lifetime gifts along with the estate that will be transferred after your death.
Because of the unification, you gain no estate tax efficiency by giving gifts during your life using the unified gift and estate tax exclusion. To explain by way of a simple example, let’s say that your estate is valued at $10.45 million. You decide to use your unified lifetime exclusion to give $5.45 million in tax-free gifts next February.
If you pass away later in 2016, the $5 million that would comprise your estate would be subject to the estate tax, because you used the entirety of your exclusion giving away the $5.45 million in tax-free gifts.
The same situation would exist if you do not give the tax-free lifetime gifts. The first $5.45 million would pass to your heirs tax-free, and the remaining $5 million would be subject to the estate tax.
Annual Gift Tax Exclusion
As you can see, using your unified lifetime exclusion to give gifts while you are living is really not a tax efficiency strategy. However, there is an additional gift tax exclusion that sits apart from the unified lifetime exclusion.
There is an annual gift tax exclusion that allows you to give up to $14,000 to an unlimited number of gift recipients each year tax-free. As long as you do not give more than $14,000 to any one person in a calendar year, you would not be using any of your unified exclusion to give the gifts in a tax-free manner.
The sustained utilization of this annual gift tax exclusion can be part of a transfer tax efficiency strategy.
Detailed Estate Tax Information
If you would like to obtain more comprehensive information about the federal estate tax and the strategies that can be implemented to ease the burden, download our in-depth special report. This report is being offered free of charge to our readers at the present time, and you can click the following link to get your copy: Free Estate Tax Report.
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