As a result of the tax relief measure that passed through the legislature at the end of last year we currently have an estate tax exclusion of $5 million and a maximum rate of 35%. What this means to you is that right now, the portion of your estate that exceeds the $5 million exclusion is subject to the 35% tax. “Right now” is the operative qualifier in the above sentence.
The fact is that these new estate tax parameters are not permanent. The new tax relief act will expire at the end of the 2012 calendar year, and if it does so without any new legislation being enacted the top estate tax rate will be raised to 55%, and the estate tax exclusion will go back to the 2002 level of just $1 million. So, if your estate is worth more than $1 million and you have every intention of living beyond the end of next year the estate tax is something that you still have to concern yourself with.
One very direct, simple, and efficient way to reduce the taxable value of your estate while transferring assets to your loved ones in a tax-free manner is through gift giving. Now it is important to understand that the estate and gift taxes are unified, so if you give gifts using this exemption your estate tax exclusion will be reduced by the amount of these gifts. But, there are some additional gift tax exemptions that can be utilized to great advantage that do not impact the lifetime unified exclusion.
For one, you can pay the tuition of any number of students equaling any amount of money as a gift free of the gift tax. In addition, there is the medical gift exemption. You can pay the health care bills and even the health care insurance premiums of any number of recipients as a gift free of taxation. And lastly, each taxpayer may give as much as $13,000 to any number of people every year is a tax-free gift, and these annual gifts do not count against your lifetime unified gift/estate tax exemption.