The laws relating to the federal estate tax have varied over time. It is important to understand the federal estate tax system as you develop your estate plan.
As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Congress granted a $5 million exemption for estate tax purposes beginning in the year 2011. As such, only estates worth more than $5 million were subject to the federal estate tax. This lifetime exemption amount (also called the “unified credit”) has been increased each year to account for inflation. In 2012, the exemption amount was set at $5.12 million. Last year, in 2013, the exemption amount was $5.25 million. For those dying in the year 2014, the IRS has set the exemption amount at $5.34 million.
This lifetime exemption is called the “unified credit” because it actually takes into account the sum total of lifetime gifts made plus the value of one’s estate at the time of death. So, if you choose to give away $5.34 million in gifts during your lifetime and you die in 2014, you will have used up your lifetime exemption amount before your death. As such, your entire estate will be subject to the federal estate tax. If you give away $2 million in gifts over your lifetime, the first $3.34 million of your estate will not be taxed. Certain gifts such as those to your spouse or charities are not included in the calculation of lifetime gifts. In addition, each year, every individual may give up to $14,000* in gifts to as many individuals as they would like without using up any of the lifetime exemption amount. Only gifts made to individuals in excess of $14,000 over the span of one year count toward your lifetime exemption amount.
Another benefit of the unified credit is that it is portable. This means that if you are married, any unused portion of your exemption amount automatically passes to your spouse upon your death. If you are married, you and your spouse share a $10.68 million lifetime exemption this year. So, if you die in 2014 having used up only $1 million of your exemption amount, your spouse’s lifetime exemption amount will be $9.68 million.
By reviewing your estate plan from time to time, you will ensure that your plan accounts for any changes in the federal estate planning structure.
*Applies to 2014, but subject to inflation adjustment in future years.