The federal estate tax carries a $5.49 million exclusion in 2017. This means that you can leave this much money to your beneficiaries without incurring any federal estate tax liability. Anything that you leave behind that exceeds this amount is potentially subject to a death tax that carries a 40% maximum rate.
This $5.49 million federal estate tax exclusion is considered to be permanent, but nothing is really permanent when you are talking about tax laws. The current estate tax parameters are in place because of provisions contained within the American Taxpayer Relief Act of 2012. This act changed the existing rules, so future legislation could also be enacted that changes the estate tax parameters.
This is something to keep a close eye on if you want to preserve your wealth. You can be exempt from the tax as long as the estate tax exclusion is over $5 million but exposed if it were to dip lower.
The $5.49 million federal estate tax exclusion results from the $5 million exclusion that was put into place for the 2011 tax year. Subsequent annual inflation adjustments have been applied. So, next year you may see an exclusion that is slightly higher than $5.49 million.
When you talk about the estate tax, you should interject the gift tax into the discussion. The gift tax is unified with the estate tax. As a result, you can’t simply give away your assets in a tax-free manner while you are alive in an effort to avoid the estate tax.
This $5.49 million exclusion applies to taxable gifts that you make throughout your life and the value of your estate. If you use all of your unified exclusion giving tax-free gifts throughout your life, all of your estate would be subject to the federal estate tax upon your death.
However, in 2017 there is a $14,000 per person gift tax exclusion that exists outside of the lifetime unified gift/estate tax exclusion. You can give as much as $14,000 ($28,000 if you are married and your spouse properly “consents) to any number of gift recipients in 2017 free of the gift tax, and these gifts would not count against your available lifetime exclusion.
If you are married, you can utilize the unlimited marital deduction and arrange for the transfer of unlimited assets to your spouse free of the gift tax or the estate tax. This assumes that your spouse is an American citizen; the unlimited deduction does not extend to non-citizen spouses.
The federal estate tax exclusion is portable between individuals who are married. This means that you could use the exclusion that your deceased spouse was entitled to as well as your own if you are a surviving spouse. However, your estate must file an Estate Tax Return (Form 709) to secure the unused exclusion.