The estate tax exemption or exclusion is the amount that can be transferred without any estate tax implications. Only the portion of an estate that exceeds this amount would be subject to the estate tax and its 40 percent top rate.
This tax can be a factor in asset transfers to anyone other than your spouse. We have an unlimited marital deduction in the United States. Married American citizens can transfer unlimited assets between one another free of the estate tax.
However, if you are exposed to the estate tax, leaving everything to your spouse tax-free is not necessarily going to be a sound estate planning strategy because your spouse’s estate could then be subject to the estate tax.
For the rest of 2015, the federal estate tax exclusion stands at $5.43 million. This figure results from a series of inflation adjustments since a $5 million benchmark was established for the 2011 calendar year. In 2016, the exclusion is going to go up by $20,000 to $5.45 million after another adjustment is applied.
Estate Tax Exclusion Portability
In many cases, the wealth that is accumulated by a married couple is the product of the efforts of each person. Every taxpayer has his or her own estate tax exclusion, but what happens to your exclusion after you pass away? If you die before your spouse, can your spouse add your exclusion to his or her own exclusion?
Prior to 2011, this was not possible because the estate tax exclusion was not “portable” between spouses. The exclusion was made portable for 2011 and 2012 after the enactment of the The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, so two exclusions were available to a surviving spouse.
This act was set to expire and portability vanish at the end of 2012, until the American Taxpayer Relief Act of 2012 was passed at the very end of that year making portability of the federal estate tax exclusion “permanent.”
Using the estate tax exclusion amount that will be in place in 2016, a surviving spouse would have a total exclusion of $10.9 million to utilize if his or her spouse died during that calendar year.
Although portability can be a very useful tool, there are drawbacks that you should discuss with your estate planning attorney.
Learn More About the Estate Tax
The estate tax can significantly reduce the wealth that you are passing along to your loved ones if your estate is in taxable territory. If you would like to learn more about the intricacies of the tax code and the estate tax efficiency strategies that can be implemented, click the following link to access our in-depth special report on this very important subject: Free Federal Estate Tax Report.