The federal estate tax exemption or exclusion is the amount that can be transferred after you pass away before the estate tax would be applied. You do not have to use any of this exclusion to leave tax-free bequests to your spouse, because there is an unlimited marital deduction. However, to use the unlimited marital deduction, the couple must be citizens of the United States.
The portion of your estate that you are transferring (to anyone other than your spouse) that exceeds the amount of the exclusion would be subject to the death tax and its 40 percent rate.
This post is being written at the end of 2015. Throughout this year, the estate tax exclusion has been $5.43 million. This is an inflation-adjusted figure that stems from the $5 million benchmark that was established for the 2011 calendar year.
Each year the Internal Revenue Service can increase the amount of the estate tax exclusion to account for inflation, and the IRS has made an announcement with regard to the exclusion for 2016. Next year, the exclusion will go up by $20,000 to $5.45 million. In previous years, the increase has been at least $90,000, so this is a very slight adjustment.
Unified Gift and Estate Tax
When you hear about the existence of the federal estate tax, you may just shrug your shoulders and resign yourself to lifetime gift giving to avoid the tax. The federal estate tax was established in 1916, and at first, this was possible.
However, a gift tax was enacted in 1924. It was repealed in 1926, but Congress reenacted the tax in 1932. In 1976, lawmakers unified the gift tax with the estate tax. As a result, the exclusion is a unified exclusion. It applies to large lifetime gifts, and it also applies to the estate that will be passed along after your death.
To provide clarity through a simple example, if you gave away $5.45 million in 2016 using the unified exclusion to give the gifts tax-free, and you died later in the year, there would be no exclusion left to apply to your estate. The entirety of your estate would be subject to the estate tax.
Learn More About the Federal Estate Tax
If you have been fortunate enough to accumulate a significant store of wealth, the estate tax is a looming threat to your legacy. You should certainly understand everything that you can about this tax when you are engaged in your estate planning efforts.
Our firm has prepared an in-depth report that will provide you with a great deal of very useful information about the death tax and the strategies that can be implemented to ease the burden. The special report is being offered free of charge at the present time, and you can click the following link to obtain access to your copy: Free Federal Estate Tax Report.