In January 2013, Congress permanently set the amount that an individual can transfer tax-free either during life or at death. The agreement essentially extended the rules that had been in place in 2011 and 2012, with one important exception.
The law permanently set the estate tax exemption at $5 million for an individual (now $5.34 million due to inflation) and $10 million for a couple (now $10.68 million). The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $5.34 million. But you can still give any number of other people $14,000 each per year without the gifts counting against the lifetime limit; see below.
The change from the previous two years is that the gift and estate tax rate will increase from 35 percent to 40 percent. This means that if you transfer more than $5.34 million either during your life or upon your death, your estate will be taxed at 40 percent.
The new estate tax rates and rules are “permanent,” but only until Congress decides to revisit them and the President agrees to the changes. But keep in mind that the new law does not address state estate taxes, which many states have.
This said, not all estates will be taxed. First, spouses can leave any amount of property to their spouses, if the spouses are U.S. citizens, free of federal estate tax. Second, the estate tax applies only to individual estates valued at more than $5.34 million ($10.68 million for couples) in 2014 (see chart). The federal government allows you this tax credit for gifts made during your life or for your estate upon your death. Third, gifts to charities are not taxed.
The new law also continues to make the estate tax exemption “portable” between spouses. This means that if the first spouse to die does not use all of his or her $5.34 million exemption, the estate of the surviving spouse may use it. So, for example, John dies in 2014 and passes on $3 million. He has no taxable estate and his wife, Mary, can pass on $7.68 million (her own $5.34 million exclusion plus her husband’s unused $2.34 million exclusion) free of federal tax. (However, to take advantage of this Mary must make an “election” on John’s estate tax return. Check with us if you have any questions.