A Brief Explanation of the Federal Estate and Gift Tax
Planning your estate involves understanding the federal estate and gift tax system. The federal estate tax is a tax on the transfer of your estate after you pass away. The gift tax, on the other hand, applies to the transfer of money or property while you are alive. These taxes are interconnected, sharing a unified exemption amount.
Exemptions and Tax Rates
Unified Exemption: For 2024, the federal estate and gift tax exemption is $13.61 million ($12.92 million for 2023) per individual. This means you can transfer up to $13.61 million in gifts and estate value without incurring any federal tax. For married couples, this amount effectively doubles to $27.22 million.
Tax Rate: If your estate exceeds the exemption amount, it will be taxed at rates ranging from 18% to 40%, depending on the value over the exemption threshold.
Annual Gift Tax Exclusion: You can give up to $18,000 per recipient per year without it counting against your lifetime exemption. Married couples can jointly give $36,000 per recipient annually.
Methods to Limit Estate Tax Exposure
Lifetime Gifting: Utilize the annual gift tax exclusion to reduce the size of your taxable estate.
Charitable Donations: Donations to qualified charities can reduce your estate's value.
Irrevocable Trusts: Placing assets in an irrevocable trust can remove them from your taxable estate. (Placing assets in a revocable (living) trust does not shield your assets from the estate tax.)
Portability/Unlimited Marital Deduction: If you are married, ensure your spouse uses any unused portion of your exemption.
Liquidity to Pay Taxes: Using tools like life insurance to provide liquidity to your estate to pay any taxes owed.
State-Level Estate and Inheritance Taxes
In addition to the federal taxes, some states impose their own estate or inheritance taxes with different exemption amounts and rates. California does not impose either tax.
Understanding the federal estate and gift tax system is crucial for effective estate planning. Knowing the exemptions, tax rates, and methods to limit exposure can help ensure your assets are distributed according to your wishes with minimal tax impact. Consulting with an estate planning attorney can provide personalized strategies to protect your legacy and meet your estate planning goals.