With the passage of the American Taxpayer Relief Act of 2013, many federal and state tax rules about Estate Taxes that had been in flux for years appear to be finally settled, at least for now. The majority of estates are still exempt from all state and federal taxes. You may still need to check if beneficiaries may be liable for inheritance tax.
A substantial amount of property can be bequeathed or given out tax -free because most estates have no obligation to pay federal estate tax or gift tax. This federal gift tax is also known as unified gift and estate tax. You can give or leave your property as long as they do not reach the assessed value of 5.34 million as of the year 2014. Assessment of the property’s value is done after a person dies to check if $5.34 million tax free limit is exceeded.
In What Circumstances Does an Estate Have to Pay an Estate Tax?
As a general rule, only estates larger than $ 5.34 million have to pay federal estate taxes.
- The personal estate tax exemption. The first $ 5.34 million is exempted from taxes. There are taxes imposed on properties that exceed exemption limit $5.34 million (as of year 2014). This amount is indexed for inflation, so increases in the future are likely. Most estates in the US do not exceed this exemption amount, so that most people can leave their assets and properties to their heirs tax free. Due to the unified gift and estate tax, prior gifts can reduce remaining personal exemption on the estate.
- Marital deduction. Properties left to surviving spouses are exempted from all estate taxes.
- Non-citizen spouses. The marital deduction does not apply to non-citizen spouses; only the personal estate tax exemption for properties left to the non-citizen spouses can be applied. However, your non-citizen spouse can benefit from a special trust, called a “qualified domestic trust” or QDOT. The property is left to the trust, not the spouse. The spouse is the beneficiary of the trust. There must be no other beneficiaries while the spouse is still alive. The spouse would receive income that the trust property generates and these amounts are not subject to estate tax. The QDOT must be established, and the property must be transferred to it, before the estate tax return of the deceased spouse is due. The trustee of the QDOT must be a U.S. citizen or a U.S. corporation, such as a bank or trust company.
- Charitable deduction. Properties left to a tax-exempt charity are also free from estate tax.
- Special Rules for Married Couples. When a spouse dies and the estate was not able to use up entire individual tax exemption that they were entitled to, the remaining spouse can add the unused portion of the personal exemption to their estate when they pass on. That gives the couple twice the total individual tax exemption.
- State estate taxes. Every state has unique estate tax laws. Even if your estate is not large enough to owe any federal estate taxes, you may still be liable for state taxes.