There are taxes on asset transfers in the United States. We have a federal estate tax, and it carries a top rate of 40 percent.
Everyone does not pay the federal estate tax, because there is a reasonably large credit or exclusion. At the present time, the exact amount of the federal estate tax exclusion is $5.34 million. This figure is in place for the rest of 2014. Next year there may be a modest increase to account for inflation.
In addition to the federal estate tax, there is also a federal gift tax. This tax is in place to prevent people from giving lifetime gifts in an effort to avoid the estate tax.
The estate tax and the gift tax are unified. Because of this unification, the $5.34 million credit or exclusion applies to gifts that you give while you are living along with the value of your estate. The top rate of the gift tax is also 40 percent.
If you are exposed to the estate tax, you really do not gain any advantages by giving lifetime gifts. For example, let’s say that you gave $5.34 million in gifts using your unified exclusion. Under these circumstances, the entirety of your estate would be subject to the estate tax. The same rate is going to be applied, and the same exclusion is in place, regardless of when the property is transferred.
Annual Gift Tax Exclusion
You do not gain any tax advantages if you use your unified exclusion during your lifetime. However, there is another gift tax exclusion that can be used to transfer assets in a tax-free manner while you are alive and well.
There is a $14,000 per person, per year gift tax exclusion that sits apart from the unified lifetime exclusion. You can use this exclusion to transfer up to $14,000 tax-free to any number of gift recipients within a calendar year. There is no limit to the overall amount that you can transfer tax-free, but you can’t transfer more than $14,000 to any one person within a year.
You could use this annual gift tax exclusion to give direct gifts, but it can alternately be used to fund certain types of trusts for the benefit of others. This exclusion can also be utilized to distribute shares in a family limited partnership in a tax-free manner.
If you take full advantage of the annual gift tax exclusion over a sustained period of time, you can transfer a significant amount of property tax-free.
Estate Planning Consultation
The estate tax can take a toll on your financial legacy, but there are steps that you can take to gain estate tax efficiency. If you would like to discuss your situation with an experienced and qualified estate planning attorney, we can help.