There are taxes on large asset transfers in the United States. We have a federal estate tax, but most people do not have to pay it, because there is a relatively large credit or exclusion.
For the rest of the 2014 calendar year, the exact amount of the federal estate tax exclusion is $5.34 million. There are annual adjustments to account for inflation, so the figure may be higher next year.
In addition to the estate tax, there is also a federal gift tax. This tax is unified with the estate tax. The $5.34 million exclusion is a unified lifetime exclusion. It applies to gifts that you give while you are living along with the estate that you are passing on to your heirs after you pass away.
Annual Gift Tax Exclusion
In addition to the $5.34 million unified lifetime gift and estate tax exclusion, there is also an annual gift tax exclusion. The amount of this exclusion is $14,000 per person at the present time.
You can give up to $14,000 to any number of people within a calendar year free of the gift tax. As long as you do not give more than $14,000 to any one person within a calendar year, you will not be utilizing any of your unified lifetime exclusion.
Unlimited Marital Deduction
There is an unlimited marital transfer tax deduction. This allows you to transfer unlimited resources to your spouse free of taxation. You would not be using any of your exclusion to transfer assets to your spouse in a tax-free manner.
Additional Gift Tax Exclusions
In addition to the annual $14,000 per person gift tax exclusion, there are two additional exclusions that you could use to give tax-free gifts to others. One of them is an educational exclusion. You can pay school tuition for other people free of the gift tax.
To use this exclusion you must pay the institution directly, and it is a tuition-only exclusion. It does not extend to books, fees, and living expenses.
There is also a medical gift tax exclusion. You can pay health care expenses for other people without incurring any gift tax responsibility. It is possible to use this exclusion to pay for health care insurance for others in a tax-free manner.
Tax Efficiency Strategies
If you are exposed to federal transfer taxes, you could utilize the $14,000 per person annual exclusion to transfer assets tax-free as you simultaneously reduce the value of your estate.
Direct gift giving is a possibility, but people sometimes use this exclusion to fund certain types of trusts. The annual gift tax exclusion can also be used to incrementally distribute shares in a family limited partnership.
Estate Planning Consultation
If you are concerned about transfer taxes or any other estate planning matter, we can help. Please call our office for a consultation.