It is definitely a good idea to be concerned about the prospect of your estate being taxed as it is being passed on to your loved ones. If your assets are exposed to the estate tax in California, you should definitely discuss estate tax efficiency strategies with a licensed estate planning attorney.
Who is exposed to the estate tax, and who is not? The answer to this question can be found by identifying the dividing line. It exists in the form of the federal estate tax credit or exclusion.
In 2014, the amount of the federal estate tax exclusion was $5.34 million per person. The amount of the federal estate tax exclusion is adjusted each year to account for inflation. The 2015 estate tax credit is $5.43 million.
This is the amount that you can pass along before the tax would be applied. Anything that you transfer above this is potentially taxable at a maximum rate of 40 percent.
Leaving Assets to Your Spouse
Fortunately, the estate tax exclusion is essentially irrelevant when you are talking about asset transfers between individuals who are married to one another. There is an unlimited marital deduction. You can leave any amount of money or property to your spouse free of the estate tax.
You could also give unlimited gifts to your spouse while you are living free of the federal gift tax, the transfer tax that is unified with the estate tax.
If you are married to someone who is not a citizen of the United States, you cannot use the unlimited marital deduction. This deduction is only available to people who are American citizens.
However, an estate planning solution does exist for Americans who are married to people who are citizens of other countries in the form of qualified domestic trusts.
The existence of the unlimited marital deduction is certainly a good thing if you want to leave behind assets to your spouse in a tax-free manner. However, this fact alone does not render estate planning irrelevant to you.
If you take things a single step further, you come to the immediate realization that your spouse is going to be in possession of assets that exceed the estate tax exclusion after receiving this inheritance. He or she will be faced with the responsibility of arranging for asset transfers with optimal tax efficiency.
It is best to tackle the situation when both partners are still alive. With the proper planning, you can mitigate your estate tax exposure and provide a financial underpinning for succeeding generations of your family.
To learn more, please download our california estate marital tax deduction report for free here.