The estate tax on the federal level is something that is a threat to your financial legacy. We are talking about a progressive tax that tops out at 40 percent. This alone is enough to give you pause, but consider the fact that it can be imposed over multiple generations.
The federal estate tax is unified with the federal gift tax. There is a unified credit or exclusion. This is the amount that you can transfer free of federal transfer taxes. It becomes applicable on transfers that exceed this exclusion amount.
For 2011 the amount of the unified credit was set at $5 million, and the legislation that mandated this figure allowed for ongoing inflation adjustments. An adjustment was applied in 2012 to bring the exclusion up to $5.12 million. The 2013 adjustment set the exclusion at $5.25 million.
At the time of this writing the 2013 calendar year is in its waning stages. Because of this, the Internal Revenue Service has released the amount of the unified credit for 2014.
The 2014 unified credit is going to be $5.34 million.
Clarification on Unification
We would like to clarify what is meant by a unified credit or exclusion. The gift tax and the estate tax are unified. As a result, the unified credit encompasses gifts that you give while you are living that are taxable added to the value of your estate as it is being passed on to your heirs.
As a result, using next year’s figure if you gave $5.34 million in taxable gifts during your lifetime, you could give these gifts tax-free utilizing your unified credit. However, the entirety of your estate would be subject to federal estate tax.
Spouses
When you are considering the implications of the unified credit you should understand the fact that each person is allotted this credit. Using the $5.34 million figure that will be in place for next year, you and your spouse would have a combined exclusion of $10.68 million.
Much of the news about the estate tax is not good. However, here is a bit of good news. The estate tax exclusion is portable. This was not the case until 2011.
In an estate planning context, portability refers the ability of a surviving spouse to use the exclusion that his or her deceased spouse was entitled to.
Because the estate tax credit or exclusion is portable, in 2013 your spouse would still have a $10.68 million exclusion if you were to die during that year.
Another thing to note about the estate tax as it applies to married people is that there is an unlimited marital deduction. You can leave an unlimited amount of property to your spouse free of the estate tax. Similarly, you can give gifts to your spouse totaling any amount over the course of your lifetime free of the gift tax.
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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