Federal Estate Tax Exemption
Inheritance and estate tax are possibly the most misunderstood portions of the tax code. Hyperbolic political terms like “death tax” add to the confusion, but what is the estate tax, who owes it and how can the tax bite be limited.
There is a difference between estate and inheritance taxes. Inheritance tax is what you pay after you have received assets from an estate. When good old Uncle Bub passes and leaves you $10,000 you will be tax on that amount based on your filing status.
Estate tax, on the other hand, is the tax levied on the value of the estate after all debts and creditors have been satisfied. Currently the federal estate tax is 35%, a considerable levy that will substantially decrease the value of the assets bequeathed to your loved ones.
The good news is that there are two exemptions built into the tax code that can reduce or eliminate the federal estate tax and maintain the full value of the estate.
The most common exemption is relationship based. The spousal exemption allows the transfer of the estate to the surviving spouse, with no tax liability regardless of the value of the estate. Portions of the estate left to other relatives or friends will be subject to federal estate tax.
The second exemption is amount based. Recent legislation has pegged the tax exempt amount at 5,000,000.00, as well as indexing the exemption for inflation. For 2013 estates valued at$ 5,250,000.00 or less incur no federal estate tax liability.
The amount based exemption is also portable, that is it passes to a surviving spouse, doubling the exempt amount, for 2013, to $10,500,000.00. Portability is not automatic; it must be applied for in a timely manner using the proper IRS forms.
The tax liability on high value estates can be reduced by utilizing financial instruments and tactics to value the estate under exemption levels. For most the estate tax is a mute issue, that being said, interpreting the rules, regulations and laws involved in estate valuation and planning is a daunting task. Add to that the complications of how estate tax liability relates to the tax code in the state you reside in and it becomes clear that regardless of the value of your estate the services of an attorney specializing in estate planning can reduce or eliminate tax liability on your estate, leaving more for your heirs. Contact our Torrance estate planning firm today for help with your estate tax planning!