Everyone Planning an Estate Should Know These
We've dealt with these terms before on this blog, but it never hurts to conduct a refresher now and then. The following are terms that are commonly used, and we want to make sure you know what they are.
The estate-tax exemption
This is the amount you can leave to your heirs without incurring any federal estate tax. For 2015, the limit is $5.43 million. If you have a spouse, both of you are entitled to this exemption, each. Not only that, but if one spouse dies, any amount of that exemption that hasn't been used rolls over to the surviving spouse. That means, if you're a single person with less than $5.43 million in assets (this amount is recalculated every year to adjust for inflation), or a married couple with less than $10.86 million, you have nothing to worry about, now. Of course, if that changes, you'll want to change your estate plan to compensate.
The gift-tax exemption
This is almost exactly the same as the estate-tax exemption, except that you don't have to wait until death to give away your assets. In all, you can give away as much as $5.43 million to relatives or friends or your favorite charity over your lifetime without owing any federal gift tax. And if you're married, both of you receive the same exemption over a lifetime. And again, if one spouse dies, whatever they haven't used rolls over to the surviving spouse.
The annual gift-tax exclusion
There is something of a bonus available, however, in that there is an annual gift-tax exclusion rule that allows anyone to make a gift of up to $14,000 every year without that amount incurring gift taxes or reducing anyone's federal gift-tax or estate-tax exemptions. Keep in mind, though, gifts in excess of $14,000 can reduce both exemptions dollar for dollar, although only by the amount over $14,000. That means, if you give someone $20,000, only $6,000 will count against your exemption.
This exclusion can really help for those people with really large estates, for which the $5.43 million estate-tax exemption isn’t enough. By making gifts up to the exclusion amount, not only do they get to reduce their taxable estate, but they shift taxable income generated by the gifted money to the children, who are probably taxed at a lower rate than you.
The strategy of gifting $14,000 per year works especially well for those who wait until late in life to start serious estate planning. Not only will your kids and other prospective heirs love the gift, but your estate plan will love it.
For example, if you're a married couple with an estate worth about $15 million, and you both die at the same time tomorrow, the federal tax bill on that estate could end up being around $1.66 million. If for the previous ten years, you had been giving each of your two grown married children and their spouses and your eight grandchildren $14,000 each, you'd have been giving away $168,000 per year, and you would have reduced your estate tax by more than one-third.
If you don't know these things, go see a qualified and highly skilled estate planning, so that you can take advantage of all of these great benefits, and reduce the burden on your loved ones when you pass away.