The resources that you want to pass along to your loved ones can be significantly eroded by estate and gift taxes. In this post we will answer some of the more frequently asked questions about these levies.
I’ve heard that the federal estate tax is only imposed on the rich. Is this true?
The answer to this question is going to depend on the definition that you use for the word “rich.”
It is true that most people are exempt from the tax. There is a $5.25 million federal estate tax exclusion. Individuals who have assets that do not exceed this amount would not be exposed to the federal estate tax.
You have to understand the fact that this $5.25 million figure encompasses everything that you own, including your home and any additional real property that you may have in your possession.
There are many people who have assets that are in excess of the estate tax exclusion amount who do not consider themselves to be truly wealthy.
Is there a state-level estate tax?
In some states there is no estate tax on the state level, but here in New York we do indeed have our own estate tax.
You could be exempt from the federal estate tax and still have some considerable New York state estate tax exposure. The New York exclusion is much lower than the federal exclusion at just $1 million. The maximum rate of the estate tax in New York is 16%.
Is an estate tax and an inheritance tax the same thing?
No, an inheritance tax is levied on the inheritance that each of the nonexempt heirs are receiving. As a result the distribution of the resources contained within one estate could result in multiple impositions of an inheritance tax.
On the other hand, an estate tax is levied on the entirety of the estate before the assets are distributed among the heirs.
Can you just give gifts while you are alive to avoid the estate tax?
You could give tax-free gifts while you are alive up to the exclusion amount of $5.25 million. This exclusion is unified, encompassing gifts that you give that are taxable and the value of your estate.
We say “that are taxable” because there is an annual $14,000 per person exclusion that exists in addition to and outside of the $5.25 million unified exclusion.
You can give as much is $14,000 to any number of others within a given year before the tax kicks in. You could use your unified exclusion to give tax-free gifts to someone in a given year above and beyond $14,000.
When I leave money to my spouse, will a tax bill be presented?
No, there is an unlimited marital deduction. You can leave any amount of money to your spouse free of the estate tax, and this applies to both the federal tax and the state estate tax.