There is a line in the sand that is drawn between people who must pay the tax and those who are exempt. It exists in the form of the federal estate tax credit or exclusion.
During the current calendar year, the amount of the federal estate tax exclusion is $5.43 million. This can sound like a good bit of money, but you have to remember the fact that your real property, your investment property, and your life insurance policies would be part of your taxable estate.
We practice law in the Los Angeles area. Given the high value of real estate in Los Angeles, the value of your home alone can go a long way toward eating up your available exclusion.
When you hear about the existence of the federal estate tax, you would logically consider giving lifetime gifts to your loved ones so that you could avoid the estate tax. This makes sense on the surface, and it used to be possible immediately after the original enactment of the estate tax in 1916.
However, the tax man closed this loophole through the enactment of the federal gift tax. It was briefly repealed after its original enactment, but it came back for good in 1932.
The gift tax and the estate tax are said to be unified under the tax code. Because the taxes are unified, the $5.43 million exclusion that we have this year is a unified lifetime exclusion. It encompasses taxable gifts that you give along with the value of the estate that will be transferred to your loved ones after you die. In addition, you are entitled to an annual gift tax exclusion of $14,000 in 2015. This figure is adjusted annually.
You really do not gain any estate tax efficiency if you decide to use your exclusion to give gifts while you are living. To provide a very simple example, let’s say that you have an estate worth $10.43 million. You give $5.43 million in tax-free gifts this year using your unified exclusion.
If you die after giving the gifts, the value of your estate would be $5 million. All of it would be subject to the estate tax, because you used up your unified gift and estate tax exclusion giving gifts.
On the other hand, if you did not give any lifetime gifts, and you died with $10.43 million this year, the same situation would exist. The first $5.43 million could be transferred tax-free, and the remaining $5 million would be subject to the estate tax.
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