You have to understand the potential impact of the federal estate tax when you are devising your estate plan. This tax is relevant if you have attained a significant level of financial success, but you could be exposed even if you to not consider yourself to be extraordinarily wealthy.
When you are inventorying your assets to determine your level of exposure, you have to understand the fact that your real property counts. Your primary residence, your vacation home, and any investment property that you personally own are going to be part of your estate for tax purposes.
We practice law in northern California, and real estate is very expensive here, so you could be “land rich” even if you don’t have an extraordinary store of cash in the bank.
In addition to your real estate, life insurance policies are also part of your estate, so you should take this into consideration when you are calculating your net worth.
Estate Tax Exclusion
During the current calendar year, the federal estate tax exclusion stands at $5.43 million. This comes about after a series of inflation adjustments that have been applied since the estate tax exclusion was set at $5 million for 2011. There could be another adjustment next year that increases this figure slightly.
You can transfer unlimited assets to your spouse tax-free, because there is an unlimited marital deduction, so you would be using a portion of your exclusion to leave bequests to people other than your spouse. The top rate of the estate tax is 40 percent.
Federal Gift Tax
Now that we have laid the foundation, we can answer the question that serves as the title of this blog post. You can give gifts while you are living if you want to, but you would not be avoiding taxation, because there is a gift tax.
The gift tax and the estate tax are unified, so the 40 percent maximum rate applies to both taxes. Plus, the $5.43 million exclusion is a unified exclusion. It encompasses the lifetime gifts that you give along with the estate that you are transferring to your heirs.
To explain via a simple example, let’s say that your estate is valued at $15.43 million. You give $5.43 million tax-free to your only daughter today, and you pass away later this year.
Under this scenario, you used all of your $5.43 million unified exclusion giving the gift. As a result, the entirety of your $10 million estate would be subject to taxation.
If you did not give the gift, and you died this year, the level of taxation would be identical. The first $5.43 million would be transferred to your heirs tax-free, and the remaining $10 million would be taxable.
Wealth Preservation Consultation
There are things that you can do to ease the burden if you are exposed to the estate tax. To explore your options, send us a message through our contact page to set up a free consultation: San Jose CA Estate Planning Attorneys.