You may think that you can just arrange for the distribution of your assets to your loved ones after you pass away without worrying about taxation. However, there is in fact a federal estate tax in place.
Many people question the fairness of this tax. The money that you are able to accumulate throughout your life is what you have left over after paying taxes on your income. Why should another tax be imposed simply because you passed away? Because the event of your death is the trigger that activates this taxation many people refer to the estate tax as the “death tax.”
The estate tax is not imposed on every estate. This is another thing that seems unfair to many. If there is going to be an estate tax because it is so necessary, why do only a small percentage of families have to pay it?
The question of whether or not your estate will be exposed to the federal estate tax can be answered by comparing the value of your assets to the federal estate tax exclusion.
A good way to inventory your assets would be to create a statement of net worth. This is a balance sheet of sorts, and with it you enter your assets and liabilities. When you are calculating the overall value of your assets you should include everything, including your home.
The amount of the estate tax exclusion currently sits at $5.25 million. Back in 2010 a new tax act was passed, and it set the estate tax exclusion at $5 million in 2011 with an adjustment for inflation in 2012. That adjustment hiked the estate tax exclusion to $5.12 million in 2012. Another adjustment for inflation was applied for 2013, and this is where the $5.25 million is coming from. There can be further inflation adjustments under existing laws.
If your assets exceed $5.25 million in taxable value your estate would potentially be subject to the federal estate tax. We use the word “potentially” because there are things that an estate planning attorney could do to help you mitigate your estate tax exposure even if your assets do exceed $5.25 million.
It is important to understand the fact that we have a gift tax in place as well as an estate tax on the federal level. The gift tax is unified with the estate tax. As a result, this $5.25 million exclusion applies to the taxable gifts that you give throughout your life and the value of your estate.
What this means is that if you were to give taxable gifts totaling $5.25 million throughout your life the entirety of your estate would be subject to the estate tax. It is worthwhile to point out the fact that the maximum rate of the federal estate tax at the present time is 40%, and this rate also applies to the gift tax and the generation-skipping transfer tax.