HOW LARGE OF A CALIFORNIA ESTATE CAN PASS FEDERAL ESTATE TAX FREE?
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ROY W. LITHERLAND
The federal estate tax is controversial in some quarters. There are those who suggest that the tax is unfair, and they offer a number of different reasons to support this claim. First and foremost, the critics argue that the estate tax is an instance of double taxation. Consider this example. A very simple, conservative individual earns a paycheck every two weeks. He is not interested in complicated investments. He puts everything that he earns in a bank account. Whatever he puts in the account is what's left after he pays taxes. He ●
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The federal estate tax is controversial in some quarters. There are those who suggest that the tax is unfair, and they offer a number of different reasons to support this claim. ●
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does very well throughout his life, he keeps working until he is 85, and he is very thrifty. There is a great deal left in that account when he passes away. He has one living daughter and she is his sole heir. Why should she have to pay a tax on her inheritance? Her father paid income taxes all of his life, and he paid other taxes as well. Why should the event of his death be a taxable one? These are good questions, and those who object to the estate tax make some valid points. Whatever you may think about the federal estate tax, it is indeed in place, and it can have a significant impact on the legacy that you are leaving behind to your loved ones. It is important to know how much you can pass on to your heirs before the estate tax is applied. There is a federal estate tax exclusion. The amount that is excluded in 2013 is $5.25 million. A base of $5 million was put into place for 2011, and there are annual adjustments for inflation. The top rate of the tax is 40%.
Gift Tax Some people hear about the estate tax and they decide that they will simply give away their assets while they're still alive. You can certainly give gifts, but for the most part it is not going to provide ●
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This is because we have a gift tax, and it is unified with the federal estate tax. It carries the same 40% maximum rate.
you with any transfer tax efficiency. This is because we have a gift tax, and it is unified with the federal estate tax. It carries the same 40% maximum rate. So, if you gave $5.25 million in gifts that are taxable throughout your life all of your estate would be subject to the estate tax. We would like to point out the fact that there is an annual gift tax
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exclusion that exists outside of the unified $5.25 million lifetime exclusion. You can give a certain amount of money each year to any number of people before the gift tax would be applicable. In 2013 this amount is $14,000, but this figure is periodically adjusted to
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Because of this a married couple would have a total estate tax exclusion of $10.5 million using the 2013 per person exclusion figure of $5.25 million.
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account for inflation. There are a couple of additional gift tax exemptions worth mentioning. You can pay the school tuition of students as a gift, and these gifts are not taxable. This applies to tuition only, not books and fees or living expenses. In addition to this you can pay the medical bills of others as a gift without incurring any gift tax liability. This extends to the purchase of health insurance for another person's benefit.
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Married Couples There is an unlimited federal estate tax marital deduction. You do not have to concern yourself with taxation when you're leaving money and property to your spouse because these transfers are exempt from the estate tax.
You can also give unlimited gifts to your spouse while you are alive free FREE CALIFORNIA LIVING TRUST REPORT
of the gift tax. However, simply deciding to transfer everything to your spouse is really not an effective estate planning strategy because your spouse would have to create his or her own estate plan once you are gone. This unlimited marital deduction is not available to someone who is married to a citizen of another country. The federal estate tax will still be looming if you leave assets to a citizen spouse, and the tax man will eventually get his money when the citizen spouse passes away. On the other hand, if you were to leave everything to a non-citizen spouse, this person could just go to his or her country of citizenship and Uncle
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Sam would be out of luck if the unlimited marital deduction had been available to that non-citizen spouse. The estate tax exclusion is available to every American taxpayer. Because of this a married couple would have a total estate tax exclusion of $10.5 million using the 2013 per person exclusion figure of $5.25 million. A question often arises: what would happen to the exclusion of a married person who passes away? Prior to 2011, the answer to this question would be that the exclusion passes away as well. However, terms contained within the tax relief act that was passed in 2010 made the estate tax exclusion portable for 2011 and 2012. Portability is a term that is used in the fields of estate planning and tax law to describe the ability of a surviving spouse to use the estate tax exclusion of his or her deceased spouse. A new tax relief act passed at the end of 2012 called the American Taxpayer Relief Act of 2012. This
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piece of legislation made portability permanent. However, changes to existing tax laws via legislative mandate are always possible.
About the Author Roy W. Litherland Roy Litherland has been providing legal services in Santa Clara and Santa Cruz Counties continuously since 1975. Roy has an undergraduate degree in accounting from Indiana State University, and a Juris Doctor degree from Indiana University, where he graduated cum laude and won honors in the areas of income taxation and estate and gift taxation. In law school he was a recipient of the Dean Faust Award and received awards and honors in income taxation and estate and gift taxation.
Roy is certified as a Legal Specialist in Estate Planning, Trust and Probate Law by the California State Bar Board of Legal Specialization.
3425 S. Bascom Ave, Suite 240 Campbell, CA 95008 Phone: (408) 356-9200
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Conclusion If your assets exceed the amount of the estate tax exclusion you must position them with tax efficiency in mind. Given its hefty 40% top rate, the estate tax can significantly erode the wealth that you are passing along to succeeding generations. A licensed estate planning attorney can assist you as you do what it takes to mitigate your estate tax exposure.
References Forbes Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate -and-Gift-Taxes Forbes http://www.forbes.com/sites/deborahljacobs/2013/01/02/after-the-fiscal -cliff-deal-estate-and-gift-tax-explained/