There are taxes on asset transfers in the United States. There is an estate tax, and there is a gift tax. The gift tax is in place to prevent people from giving away their assets while they are living in an effort to avoid the estate tax.
These two taxes are unified under the tax code. There is a $5.34 million unified lifetime exclusion or credit in 2014. This is the amount that you could transfer free of taxation. Because of this relatively large exclusion, most families will never pay the gift tax or the estate tax.
In addition to the federal estate tax, here in the state of Connecticut we also have a state-level estate tax. The Connecticut state estate tax exclusion is considerably lower than the federal estate tax exclusion. Our exclusion in Connecticut is just $2 million.
An estate tax and an inheritance tax are two different types of taxes. With an estate tax, the entirety of the taxable portion of the estate in question is taxed before the estate is distributed among the heirs. An inheritance tax is levied on each individual non-exempt inheritor.
There is no federal inheritance tax. There are a handful of states in the union that levy inheritance taxes on the state level, but Connecticut is not one of them.
People who live in Maryland and New Jersey face the prospect of paying both a state-level inheritance tax and a state-level estate tax.
Generally speaking, asset transfers to very close relatives like spouses and children are exempt in the states that levy inheritance taxes.
Tax Efficiency Strategies
If you are exposed to any of these taxes, there are steps that you can take to mitigate your tax burden. The optimal strategy will vary depending on the circumstances. Various different types of irrevocable trusts can provide tax efficiency, and there are other structures that are useful as well, such as family limited partnerships.
We touched upon the unified lifetime gift and estate tax exclusion in a previous section. There is an additional gift tax exclusion that can be used to give tax-free gifts. You may give as much as $14,000 in a calendar year to any number of gift recipients free of the gift tax.
The utilization of this exclusion can be part of a tax efficiency plan. You could use it to give direct gifts, but you could also use it to incrementally fund certain types of trusts.
Wealth Preservation Consultation
If you plan ahead proactively, you can position your assets in a tax efficient manner and preserve your wealth for the benefit of your loved ones. We provide free consultations to people in the greater Hartford area. If you would like to discuss wealth preservation with a licensed attorney, contact us to schedule an appointment.