People who want to give their family as much as possible from their estates prefer to plan a more comprehensive estate plan that will reduce or avoid taxes.
Depending on your circumstances, a plan to reduce either estate taxes or gift taxes may be more beneficial.
What are estate taxes and how are they calculated? Anyone who owns property in the United States is subject to federal estate taxes regardless of whether your property goes through probate or not after your death.
Fortunately, Congress acted in time so that the personal estate tax exemption for 2013 is $5.25 million. In previous years, the amount was only $1 million, which had been the total exemption for many years. The average American will likely not have to worry about paying any federal estate tax, if your estate is not large enough.
Therefore, if your personal estate is worth $5.25 million or less, it can be passed to anybody upon your death without any federal estate taxes being owed. Unfortunately, some states, like New Jersey, do require that estate taxes be paid for personal property worth much less than $5.25 million. In New Jersey, estate taxes must be paid if your property is worth more than $675,000.
If your estate is worth more than $5.25 million your estate will owe federal estate taxes. You can reduce the value of your estate by making nontaxable gifts during your life.
A gift is property that you transfer for free to a person or an institution. For gift tax purposes, you can give away property worth up to $14,000 in a calendar year free of gift tax. However, if the gift in a calendar year is more than $14,000 the value of your $5.25 million personal exemption will be reduced by the difference. For example, if the gift is $50,000, your personal exemption will be reduced by $36,000.
If your estate is already worth more than $5.25 million, it will be more beneficial to your estate plan to give gifts during your life. On the other hand, if your estate is worth $5.25 million or less, you should plan your gift giving more carefully during life and in your will.
During life, a gift transfer that is worth more than $14,000 will be taxed and the person giving the gift will be responsible for paying it. Gifts bequeathed in wills, regardless of the value, will not be subject to federal inheritance tax by the recipient, but some states (like New Jersey) do require it.
Wealthy couples can benefit from another provision of the federal estate tax law called “portability”. If one spouse does not use up all of the personal exemption at death, the balance can be used by the surviving spouse. For example, if one spouse dies leaving an estate worth $4 million to the children, the remaining $1 million can be used by the surviving spouse whose personal estate exemption will become $6 million.
In order for the surviving spouse to take advantage of the unused portion, he or she must claim it on the estate tax return filed within 9 months of the deceased spouse’s death. The return must be filed even though no estate tax is owed on the deceased spouse’s estate.
A surviving spouse can use all of the deceased spouse’s personal exemption if all of the property is left to the surviving spouse. In this case, if the couple has a shared estate worth $9 million and one spouse dies leaving a $4.5 million estate, the entire amount is exempt from estate tax due to the marital deduction.
The surviving spouse’s estate is now worth $9 million, which is over the personal exemption amount. However, the deceased spouse did not use up any of the $5.25 million exemption, so this can be “ported” to the surviving spouse, provided the proper procedure is followed.
If you are concerned about leaving debts for your surviving loved ones or not being able to give as much as you would like due to potential estate taxes, consult an estate planning attorney or a financial planner in your home state.
Information contained in this article is not intended to be legal advice nor applicable to all situations. For legal assistance, contact an attorney in your state of residence. You can visit Arleen’s website at arleenrichards-law.info.
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