People who have been able to accumulate a significant store of wealth must be concerned about possible federal estate tax exposure. This tax can take a huge bite out of the wealth that you are passing on to your loved ones.
How big of a bite are we talking about? The maximum rate of the federal estate tax is 40 percent.
To determine your level of estate tax exposure, you must compare the value of your estate to the amount of the estate tax exclusion. Anything that you intend to transfer that exceeds this amount would potentially be subject to the death tax.
During the current calendar year, the estate tax exclusion stands at $5.34 million. There are inflation adjustments added each year, so you may see a higher figure in 2015.
Unlimited Marital Estate Tax Deduction
There is an unlimited marital estate tax deduction. The $5.34 million exclusion is used to transfer assets to people other than your spouse in a tax-free manner. Because of the unlimited marital estate tax deduction, you can leave any amount of money to your spouse tax-free.
There is a caveat to the above statement. To utilize the unlimited marital deduction, the surviving spouse must be an American citizen.
Why would the powers-that-be preclude a non-citizen spouse from utilizing this deduction? If you were to use the unlimited marital deduction to leave a large estate to your citizen spouse, you would only be postponing the tax responsibility. Your spouse would then be in possession of an estate that was subject to the estate tax, so the IRS would eventually get their share.
If the unlimited marital deduction was extended to a spouse who was not a citizen of the United States, this individual could return to his or her country of citizenship. Under these circumstances, the Internal Revenue Service would have no recourse, and no taxes would be paid.
Federal Gift Tax
In addition to the estate tax, we also have a federal gift tax. The gift tax is unified with the estate tax. It is in place to prevent people from giving away assets while they are living to avoid the estate tax.
The $5.34 million exclusion encompasses lifetime gifts along with the value of the estate that you are passing on to your heirs.
The unlimited marital deduction extends to lifetime gifts that you give to your spouse.
Planning Is Still Required
Leaving everything to your spouse tax-free is not a viable estate planning solution, because your spouse would then be in possession of a taxable estate. Intelligent tax planning is still required.
We can help if you would like to implement tax efficiency strategies.