Many people are not aware of the fact that there is a tax on asset transfers in the United States. When your estate is passed on to your heirs it is subject to the federal estate tax. The reason why most families do not have to pay this tax is because there is an estate tax exclusion. If the value of your assets does not exceed the amount of this exclusion there would be no federal estate tax liability.
At the present time the amount of the federal estate tax exclusion is $5.25 million. Anything that you pass along to your heirs that exceeds this amount would be subject to a death tax that tops out at 40%.
The $5.25 million exclusion is allotted to each individual taxpayer. As a result, if you are married you have a $5.25 million exclusion, and your spouse has his or her own $5.25 million exclusion. If you combine the two you have $10.5 million to utilize as a couple.
This exclusion is said to be portable. In an estate planning context portability is referring to the ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse. As a result, using the 2013 exclusion of $5.25 million, if your spouse passes away without having used any of his or her exclusion you have a total estate tax cushion of $10.5 million.
It is indeed possible to use some of your exclusion while you are still alive because the estate tax is unified with the gift tax. Yes, there is a tax on the gifts that you give in the United States. The $5.25 million lifetime exclusion encompasses taxable gifts and the value of your estate. So, if you gave $3 million in gifts using the lifetime unified exclusion while you are alive only $2.25 million would be left to apply to the value of your estate after you die.
Another thing to know about the federal estate tax is that there is an unlimited marital deduction. There is no limit to the amount of money that you can transfer to your spouse tax free. The only caveat to this would be that the unlimited marital deduction is only extended to spouses who are United States citizens. If you are married to someone who is a citizen of another country the estate tax would be applicable on asset transfers.
If you are exposed to the estate tax all is not lost. There are various different steps that you can take to mitigate your exposure. The ideal course of action will vary on a case-by-case basis.
If you would like to explore estate tax efficiency strategies with the benefit of legal counsel contact our firm to schedule a wealth preservation consultation.