There is a federal estate tax that you should fully understand if you have been highly successful from a financial standpoint. This tax can make a heavy negative impact because it carries a maximum rate of 40 percent.
We are saying that the estate tax is a factor for high net worth individuals because there is a relatively large credit or exclusion. The exclusion allows you to transfer a certain amount before the estate tax would become applicable. For the rest of this calendar year, the estate tax exclusion is $5.43 million, but the 2016 figure will probably be adjusted to account for inflation.
You would use a portion of this exclusion to transfer assets tax-free to anyone other than your spouse. There is an unlimited estate tax marital deduction. This deduction allows you to transfer any amount of money and/or property to your spouse free of the estate tax.
We should point out the fact that there is also a gift tax in place, and it is unified with the estate tax. The gift tax exists to stop people from giving gifts in an effort to avoid the estate tax. The $5.43 million exclusion is a unified exclusion that encompasses large lifetime gifts along with the value of your estate. This unlimited marital deduction also extends to lifetime gift giving.
The federal government is now recognizing same-sex marriages, so anyone who is legally married can take advantage of the unlimited marital deduction. In fact, the court case that led to the recognition of same-sex marriages was initiated by a woman named Edith Windsor who was forced to pay the federal estate tax after the death of her spouse.
The unlimited marital transfer tax deduction is only available to American citizens. Transfers to a non-citizen spouse would potentially be subject to taxation. This is because of the fact that the government does not want a non-citizen spouse to return to his or her country of citizenship with a tax-free inheritance. Under those circumstances, the IRS would never be in a position to collect anything.
Portability of Exclusion
While we are looking at the way that the estate tax applies to married couples, we should touch upon the portability of the estate tax exclusion. A surviving spouse could utilize the exclusion that was allotted to his or her deceased spouse. This is the condition of portability in a legal context.
To opt for portability, Internal Revenue Service Form 706 must be filed.
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If you would like to discuss taxation or any other estate planning matter with a licensed professional, our firm would be glad to help. We provide our clients with personalized attention and can help you create a custom crafted plan.
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