There can be slight adjustments to relevant parameters that you should be aware of when you are engaged in the ongoing process of estate planning. High net worth people have to be concerned about the impact of federal transfer taxes, and the thresholds are subject to change.
The portion of an estate that can be transferred tax-free is determined by the estate tax credit or exclusion. A $5 million exclusion was put in place for the 2011 calendar year, and this benchmark is still in place, but there have been annual adjustments to account for inflation.
We recently reported on the inflation adjustment for 2016. This year, the exclusion has been $5.43 million, but it is going up to $5.49 million next year, 2017.
Annual Gift Tax Exclusion
In addition to the federal estate tax, there is also a federal gift tax that exists to stop people from giving gifts to avoid the death tax. The $5.45 million exclusion that we will have next year is a unified exclusion that encompasses lifetime gift giving along with the estate that will be transferred after you are gone.
This is not the only exclusion that can be used to give gifts in a tax-free manner while you are living. There is also an annual gift tax exclusion. Throughout 2015, the annual gift tax exclusion has been $14,000. The first $14,000 that you give to any number of gift recipients can be given free of taxation using this exclusion.
You could use a portion of your unified lifetime exclusion to give tax free gifts to individuals that exceed $14,000 per person.
The Internal Revenue Service has announced that there will be no increase in the annual gift tax exclusion for 2016. This exclusion will stand fast at $14,000 per person.
If you are exposed to the estate tax, there are various different strategies that can be implemented to ease the burden. The utilization of the annual gift tax exclusion can be part of the plan.
Since each taxpayer is allowed to give up to $14,000 to any number of gift recipients tax-free, if you are married, you and your spouse could combine your respective exclusions. This would enable you to transfer up to $28,000 to any number of people within a calendar year free of the gift tax.
Assets could be transferred tax-free to people who would otherwise be inheriting them someday, and you would be reducing the value of your estate for tax purposes as you give lifetime gifts.
Protect Your Resources
In addition to the federal estate tax, we also have a state-level estate tax here in New York, and the exclusion is just $3.125 million at the present time. So, for the time being, you could face state-level exposure even if you are exempt from the federal estate tax.
Our firm can help if you would like to explore wealth preservation strategies. To set up a consultation, send us a message through this page: Smithtown NY Estate Planning Attorneys.