To answer the question that serves as the title of this post, we have to provide a brief explanation of the federal estate tax. It can definitely have a major impact on your family’s future if you have accumulated a significant store wealth. It carries a 40 percent top rate, and it is potentially applicable on the portion of your estate that exceeds the exclusion.
At the time of this writing in 2023, the exclusion stands at $12.92 million. This is the highest it has ever been, and it will stay at this level indexed for inflation through 2025.
In 2026, a key provision in the Tax Cuts and Jobs Act will expire, and the exclusion will go back to the 2017 level, which is $5.49 million.
There is no taxation on transfers between spouses that are American citizens because there is an unlimited marital deduction. The estate tax exclusion is portable, so a surviving spouse can use their deceased spouse’s exclusion.
We should point out the fact that there are 12 states in the union that have state-level estate taxes. Fortunately, California is not one of these states. However, if you own property in a state with an estate tax, it could apply to your estate depending on its value. For example, Oregon has an estate tax, and the exclusion is just $1 million.
Federal Gift Tax
Lifetime gift giving would make a lot of sense as a way to avoid the estate tax, but the loophole is closed because there is a gift tax in place. It has been a fact of life continuously since 1932, and the estate tax and the gift tax are unified under the tax code.
The unification makes the exclusion a unified exclusion that applies to large lifetime gifts that you give while you are living and your estate. However, the “large” qualifier is very relevant.
There is an additional annual exclusion. You can give up to $17,000 to an unlimited number of recipients each year free of federal transfer taxes.
There is no limit to the total amount you can give as long as you do not give more than $17,000 to any one person in a calendar year. If you are married, you and your spouse can combine your respective exclusions to give $34,000 tax-free to any number of people each year.
This can be part of an estate tax efficiency strategy if your estate is in taxable territory. If you have married children, you could give $34,000 annually to each husband and each wife, and this would add up considerably over time.
There are two additional exclusions that you should be aware of if taxation is going to be a source of concern. If you want to pay school tuition for students, the gift tax would not be levied, as long as you pay the institution directly.
This is a tuition-only exclusion that does not extend to living expenses, tuition, and fees. Of course, you can use your annual per person exclusion to provide a student with additional support.
Another exclusion gives you the ability to pay medical bills for others without being taxed. In addition to services rendered, the exclusion extends to the payment of health insurance premiums.
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