If you have been particularly successful from a financial standpoint, you may be in a position to make things more comfortable for your loved ones now and into the future.
However, accumulating wealth is not enough. You must also preserve your wealth, because the federal estate tax looms large as a source of asset erosion.
This tax carries a 40 percent maximum rate, and this is an attention-getting figure. Without question, a 40 percent death tax on the taxable portion of your estate can take a significant toll.
The good news is that you can transfer some of your estate tax-free. First of all, there is an unlimited federal estate tax marital deduction. If you are legally married in the eyes of the law, you can transfer unlimited assets to your spouse free of taxation.
However, to use the federal estate tax marital deduction, you must be married to a person who is a citizen of the United States. This stipulation is in place because the Internal Revenue Service wants to be able to impose the tax eventually.
If you were to leave everything to your citizen spouse tax-free, the estate tax would still be looming, because your surviving spouse would be in possession of a taxable estate.
On the other hand, if the estate tax marital deduction was afforded to non-citizen spouses, the IRS could be left out in the cold if the surviving spouse was to return to his or her country of citizenship.
Federal Estate Tax Exclusion
There is another way that you can transfer assets in a tax-free manner. We have a federal estate tax credit or exclusion. This is the amount that you can transfer to people other than your spouse without incurring any transfer tax liability.
In 2015, the federal estate tax exclusion is $5.43 million.
Federal Gift Tax
The tax man does not want you to be able to give gifts to your family members while you are living to avoid the estate tax. To prevent this, there is also a federal gift tax, and it is unified with the federal estate tax.
The unlimited marital deduction also applies to lifetime gift giving. As long as you are married to an American citizen, you can transfer unlimited assets to your spouse, either while you are living or after you pass away, tax-free.
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