At the present time the estate tax exclusion is $5 million as a result of the passage of the tax relief act that was signed into law last December. However, it is important to remember that this change is not a permanent one.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will sunset at the end of the 2012 calendar year in the same manner that the Economic Growth and Tax Relief Reconciliation Act of 2001 was set to expire at the end of 2010. If no additional legislation is passed the estate tax exclusion will return to $1 million and the top rate of the tax will revert back to 55% in 2013.
So the reality is that this $5 million exemption may be short-lived, so even if the overall value of your estate is between $1 million and $5 million your heirs may still be subject to the estate tax come 2013.
One way to reduce the taxable value of your estate is through the practice of gift giving, but of course there is a gift tax in place to close this loophole. There is a $5 million lifetime gift tax exemption, but because the gift tax and estate tax are unified your available estate tax exclusion would be reduced by the amount of any gift that you gave using the lifetime unified exemption. However, there are some tax-free gifts that can be given that do not impact the lifetime unified exemption, and one of them is the educational gift.
You can pay the school tuition any number of students equaling any amount of money as a gift free of the gift tax. It should be noted that this exemption does not cover books, fees, and living expenses. However, there is a $13,000 per person annual exemption as well, and these gifts do not impact the lifetime unified exclusion either. So you can supplement the tuition gift with a $13,000 cash gift if you choose to do so and these gifts could be given free of taxation.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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