The federal estate tax looms large for high net worth individuals because it carries a very hefty 40 percent rate. It is imposed on the portion of an estate that exceeds the amount of the exclusion, and in 2021, the federal estate tax exclusion is $11.7 million.
You do not have to be concerned about paying the tax on transfers to your spouse, because there is an unlimited marital deduction. This gives you the ability to transfer any amount of property to your spouse tax-free, but there is one caveat.
In order to use the unlimited marital deduction, your spouse must be an American citizen. The reason why this stipulation is in place is because the deduction does not really reduce the family’s tax burden. After the death of the surviving spouse, the tax would still be a factor.
The dynamic would be entirely different if the surviving spouse was a foreign citizen. They could simply return to their country of citizenship, and the United States Internal Revenue Service would have no recourse.
On the subject of spouses and the estate tax, the exclusion has been portable since the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). In this context, the term “portability” is used to describe the ability of a surviving spouse to use their deceased spouse’s exclusion.
Federal Gift Tax
The logical reaction to the estate tax would be lifetime gift giving. People that were exposed to the tax used to take advantage of this loophole shortly after the death tax was enacted in 1916.
In 1924, a federal gift tax was put into place to put a stop to lifetime gift giving as a way to get around the estate tax. It was repealed two years later, but it was reenacted in 1932, and it has been a fact of life ever since then.
During the 1970s, the estate tax and the gift tax were unified under the tax code. As a result, the $11.7 million exclusion that we have this year is a unified exclusion. It applies to your estate and large gifts that you give while you are living.
Additional Gift Tax Exclusions
The unified lifetime exclusion is not the only gift tax exemption that you can utilize. There is a $15,000 a year per person gift tax exclusion that sits apart from the unified exclusion. You can give this much to any number of gift recipients in a given calendar year tax-free.
There are a couple of other gift tax exclusions that can be used to help others without being taxed for your generosity.
You can use the education exclusion to pay school tuition for students free of taxation. This is a tuition only exemption, but you can use your $15,000 annual exclusion to provide additional support.
Since this is a per person exclusion, you and your spouse would have a total annual exclusion of $30,000 between you, so this would increase your tax-free giving capabilities.
The other exemption allows you to pay medical bills on behalf of other people, and this exclusion extends to the payment of health insurance premiums.
Hawaii State Estate Tax
Most states do not have state-level estate taxes, but Hawaii does in fact have a death tax, and the exclusion is about half of the federal exclusion. There is no gift tax in Hawaii, so you could give gifts while you are living to reduce your state-level estate tax exposure.
Attend a Free Webinar!
We conduct webinars on an ongoing basis to provide learning opportunities to members of the communities we serve. There are a number dates on the schedule right now, and we urge you to join us for one of these upcoming sessions.
Since there is no charge and you don’t have to go anywhere to participate, this is a great opportunity to come away with some important information.
You can see the dates if you visit our webinar page, and when you identify the session that works for you, follow the simple instructions to register.