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If you are assuming that your estate will be taxed by the federal government, you are in for a pleasant surprise. It is very likely that your family will pay absolutely nothing.
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Yes, but there is a credit or exclusion. This is the amount that can be transferred before the estate tax would be applicable on the remainder. At the time of this writing, it is almost $12 million, so very few families pay the federal estate tax. Those that are exposed face a heavy bite, because it carries a 40 percent maximum rate.
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The answer is yes and no. If you are married to an American citizen, you can use the marital deduction to transfer unlimited resources to your spouse tax-free. Transfers to others, even your children, are potentially taxable. Since 2011, the estate tax has been portable between spouses. This means that a surviving spouse could use the exclusion that was allotted to their deceased spouse.
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There are some states in the union that have state-level estate taxes. Here in Michigan where we practice law, there is no estate tax. However, if you own valuable property in a state that has an estate tax, that tax can apply to your estate even if you are a citizen of Michigan. In addition to state-level estate taxes, there are six states that have inheritance taxes. Unlike an estate tax, an inheritance tax is imposed on transfers to each individual inheritor that is not exempt. There is no inheritance tax in Michigan, but if you inherit property that is located in a state with this type of tax, it would be a factor for you. However, in this instance, close relatives like spouses, parents, children, grandchildren, and siblings are typically exempt.
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This is another question with a yes and no answer. Shortly after the estate tax was enacted in 1916, people gave gifts to their loved ones to get around the estate tax. A gift tax was enacted in 1924 to close the loophole, but it was repealed in 1926. In 1932, the gift tax was reenacted, and it is been a fact of life since then. During the 1970s, the gift tax was unified with the estate tax, so the exclusion is a unified exclusion. It applies to lifetime gifts along with your estate, so your available exclusion would be reduced if you give gifts while you are living. This being stated, there is another gift tax exclusion that you can use to transfer up to $15,000 to any number of gift recipients in a year free of taxation. You can pay school tuition for others without incurring any gift tax liability, and there is also a medical bill exemption.
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Many people are pleasantly surprised to hear that inheritances are not looked upon as taxable income by the IRS or state income tax authorities. This applies to insurance policy proceeds along with direct inheritances. If you inherit assets that appreciated during the life of the person that left you the resources, you would get a step-up in basis. From a capital gains perspective, you would not be responsible for the gains that accumulated before you assumed ownership of the assets.
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We Are Here to Help!
Whether you are exposed to the estate tax or not, we can help you devise a custom crafted plan that is ideal for you and your family. You can schedule a consultation appointment if you call us at 248-251-1001, and you can fill out our contact form if you would prefer to send us a message.
