There is a federal estate tax to contend with if you have been particularly successful throughout your life. During 2014 the amount of the federal estate tax exclusion is $5.34 million. You can arrange for the transfer of assets equaling as much as $5.34 million before the estate tax would be applicable. The maximum rate of the federal estate tax is 40 percent.
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“Why not just give gifts while you are living to avoid the estate tax?“ ●
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When you hear the above you may have an idea: why not just give gifts while you are living to avoid the estate tax? This is the same idea that wealthy people had back in 1916 when the estate tax was enacted. At first, people did in fact give away assets to their heirs to avoid the estate tax. The tax man was not keen on this idea, so a gift tax was enacted in 1924 to close this loophole. It was repealed for several years, but it returned to stay in 1932. In 1976 it became unified with the federal estate tax.
Unification of Federal Gift and Estate Tax This $5.34 million exclusion that we touched upon in the first section is a unified exclusion. It applies to the taxable gifts that you give while you are living coupled with the value of your estate as it is being passed on to your heirs. To paint a simple picture, if you gave away $5.34 million during your life tax-free using the unified exclusion, the entirety of your estate would be subject to the estate tax. You would have used all of your unified transfer tax exclusion giving gifts.
Annual Gift Tax Exclusion Using the unified transfer tax exclusion to give tax-free gifts while you are living will just delay the inevitable. However, there is another gift tax exclusion that you can use that will provide tax savings.
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