We practice law in Naples, Florida, and we were attracted here for many reasons. It is truly beautiful from a natural standpoint, with stunning foliage, abundant wildlife, and fantastic beaches. Plus, cultural and recreational opportunities abound, and everyone is aware of the fact that you have eternal summer when you live in south Florida.
Many people who can live anywhere that they would like to live settle down in the Naples area. As a result, there is a very high concentration of millionaires. A couple of years ago, City Info stated that there is a 9.1 percent concentration of millionaires. This put Naples at number seven among American municipalities.
Wealth is certainly a good thing, but if you have been successful financially, you have to be concerned about taxation. Let’s look at the details.
Federal Estate Tax
When you leave assets to others after you pass away, these asset transfers are potentially taxable. Most people do not pay the estate tax because there is a credit or exclusion. If the value of your estate does not exceed the amount of this exclusion, the estate will not be subject to the death tax.
At the present time, the amount of this credit or exclusion is $5.45 million. This is derived from a base of $5 million that was put into place for the 2011 calendar year. Since then, there have been annual adjustments to account for inflation. Next year the figure may be a bit higher after another inflation adjustment is applied. The maximum rate of the estate tax is 40 percent at the time of this writing in 2016.
Marital Deduction
The unlimited marital deduction allows you to leave any amount of money and/or property to your spouse without incurring any estate tax liability. You do not have to use any of your unified lifetime estate tax exclusion to transfer assets to your spouse.
We should point out the fact that there is a gift tax in place as well as an estate tax. The gift tax exists to prevent people from giving away assets while they are living in an effort to avoid the estate tax. It carries the same 40 percent top rate.
This unlimited marital deduction also extends to lifetime gifting. You can give unlimited gifts to your spouse while you are living in a tax-free manner.
There is a caveat to the above: the unlimited marital deduction is only available to spouses who are citizens of the United States.
Why would this stipulation be in place? The reason why the powers that be do not mind if you leave everything to your spouse tax-free is because the estate tax will still be a factor when your surviving spouse dies.
This is why the utilization of the unlimited marital deduction is not a comprehensive estate planning solution. You are just punting the situation down the road if you leave everything to your spouse without implementing any type of a cogent tax efficiency plan.
If the unlimited marital deduction was extended to non-citizen spouses, a surviving spouse could return to his or her country of citizenship, inheritance in tow. The United States Internal Revenue Service would not be in a position to collect anything after the surviving spouse passed away.
There are estate planning techniques that can be implemented to gain tax efficiency if you are married to someone who is a citizen of another country. Qualified domestic trusts are often utilized under these circumstances.
Portability of Estate Tax Exclusion
While we are on the topic of the unlimited marital deduction, we should touch upon the matter of estate tax exclusion portability. In an estate planning context, the term portability refers to the ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse.
Prior to the enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the estate tax exclusion was not portable. Essentially, when you died, your exclusion died with you.
A provision contained within this tax relief act made the estate tax exclusion portable in 2011 and 2012. The American Taxpayer Relief Act of 2012 made the portability of the estate tax exclusion permanent.
It is permanent in the sense that there is no particular date upon which portability will expire. However, when it comes to tax laws, nothing is etched in stone, because changes can always be enacted via legislative mandate.
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If you would like to learn more about taxation and other important estate planning topics, visit our seminar page and register for the free session that fits into your schedule.
