People are sometimes confused about death taxes. They look at the terms “estate” and “inheritance” as interchangeable. As a result, they assume that an estate tax is the same thing as an inheritance tax.
This is not the case. There is a federal estate tax, but there is no federal inheritance tax. However, there are six states that levy state level inheritance taxes. We have offices in Kentucky, and Kentucky is one of these six states.
You can learn about the ramifications in person if you register to attend one of our free seminars.
You should also understand the potential impact the federal estate tax if you have been particularly successful throughout your life. Let’s look at the facts.
Legacy Erosion
If you have been financially successful throughout your life, you may feel as though the heavy lifting has been done. However, accumulating wealth is only part of the equation. You must also preserve wealth that you intend to pass along to your loved ones.
The federal estate tax can take a toll on your financial legacy. At the time of this writing in 2016 the top rate of the estate tax is 40 percent. Clearly, this is a hefty percentage that can have a significant impact.
Who is exposed to the federal estate tax, and who is exempt? Let’s look at this question.
There is a federal estate tax credit or exclusion. This is the amount that you can pass on to your heirs free of taxation. Any portion of your estate that exceeds the amount of the exclusion would potentially be subject to taxation.
In 2016, the exact amount of the federal estate tax exclusion is $5.45 million. This may sound like a rather arbitrary figure, but there is a rationale behind it.
A base of $5 million was put into place for the 2011 calendar year, and there have been ongoing adjustments to account for inflation since then. Next year another inflation adjustment could be applied.
Federal Gift Tax
In addition to the federal estate tax, we also have a federal gift tax. This tax is in place to prevent people from giving away assets while they are living in an effort to avoid the estate tax.
The gift tax and the estate tax are unified. Because of this unification, the $5.45 million exclusion that is in place in 2016 is a unified exclusion. It encompasses taxable gifts that you give while you are living along with the value of the estate that you are passing on to your heirs.
To provide clarity by way of example, if you were to give away $5.45 million in tax-free gifts while you are living, you would have used your entire unified exclusion. As a result, there would be nothing left to apply to your estate after you pass away.
Unlimited Marital Deduction
There is an unlimited marital transfer tax deduction. You can use this deduction to transfer unlimited assets to your spouse free of taxation, either while you are living or after you pass away.
You are not using any of your unified transfer tax deduction to give tax-free gifts or bequests to your spouse, assuming your spouse is a citizen of the United States.
The unlimited marital transfer tax deduction is not available to non-citizen spouses. However, there are tax savings options that can be implemented if you are married to someone from another country. Qualified domestic trusts are often utilized under these circumstances. This is a matter that you should discuss with a licensed estate planning attorney.
State-Level Estate Taxes
The federal estate tax is applicable in all 50 states, but there are a number of states that levy state-level estate taxes. We have offices in the state of Kentucky as we have stated, and there is no state estate tax to contend with in Kentucky.
However, if you own valuable property in a state that has a state-level estate tax, there could be estate tax exposure, even if you do not reside in that state.
Action Is Required
If you have not discussed your financial situation and your estate planning goals with a licensed attorney, action is required. There are various ways that you can position your assets to mitigate exposure to the Kentucky inheritance tax and other taxes. Plus, even if taxation is not a concern, your plan should be custom crafted to suit your needs.
Send us a message through our contact page or call us at (606) 324-5516 to schedule a consultation, and we will help you put a plan in place.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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