HOW LARGE OF AN ESTATE CAN PASS FEDERAL ESTATE TAX FREE IN IOWA? A Closer Look at Estate Tax in Iowa and How You Can Minimize Your Estate Tax Exposure
DENNIS D. DUFFY IOWA ESTATE PLANNING ATTORNEY
The question of how much you can pass to your loved ones federal estate tax free boils down to the value of your estate as compared to the federal estate tax exclusion. At the present time the estate tax exclusion is $5.25 million. The maximum rate of the tax is 40 percent.
STATEMENT OF NET WORTH It is a good idea to create a game plan when you are planning your estate. If you create a statement of net worth you will know exactly how much you have to pass along to your loved ones. You inventory your assets and your debts, and you gain a renewed understanding of the form of these assets and the impact of the debts. The form of the assets is something that is very important because there are certain estate planning techniques that can be implemented that are ideal when you have highly appreciable securities. If you find that the overall value of your assets exceeds $5.25 million you know that you should take steps to position your resources in a tax efficient manner.
A CLOSER LOOK The $5.25 million federal estate tax exclusion stems from the $5 million exclusion that was put into place for the 2011 calendar year. This amount was mandated within the tax relief act that was passed at the end of 2010.
How Large of an Estate Can Pass Federal Estate Tax Free in Iowa?
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It allowed for an increase of the $5 million in 2012 to account for inflation. The exclusion in 2012 was $5.12 million. That tax relief act, which is formally called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, was scheduled to expire at the end of 2012. This is part of what the big fiscal cliff hoopla was all about. If this would have taken place without any new tax relief being implemented the estate tax exclusion would have been $1 million in 2013, and the top rate would have been 55%. As it turned out there was indeed a tax relief act passed that we are calling the American Taxpayer Relief Act of 2012. This act extended the $5 million base that was originally put into place using 2011 dollars. Though the act is called a tax relief measure the rate went up from 35 percent to 40 percent. Another inflation adjustment set the federal estate tax exclusion at $5.25 million in 2013. Next year we may see another adjustment. Unlike the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 this new tax relief act is not going to sunset or expire. The $5.25 million exclusion with inflation adjustments, and the 40 percent maximum rate, are said to be permanent. This does not mean that you should close the book on the subject because you don't have assets that exceed $5.25 million (or thereabouts). There can be new legislation passed that does in fact change the estate tax parameters. As a case in point, the White House circulated a proposed
How Large of an Estate Can Pass Federal Estate Tax Free in Iowa?
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2014 federal budget not too long ago, and it included changes to the parameters of the federal estate tax. If the budget was passed the estate tax exclusion would go down to $3.5 million in 2018. The maximum rate of the tax would go up to 55 percent.
ESTATE/GIFT TAX UNIFICATION You may hear about the estate tax and resolve to give gifts while you are living to avoid it. This is not a viable strategy. There is a gift tax in place, and it carries the same rate as the estate tax because the two taxes are unified. Any gifts that you give to one individual that exceed $14,000 in a year are subject to the gift tax. The $5.25 million is a unified exclusion. Therefore, you can use part of this exclusion to give gifts that exceed $14,000 per person, per year tax-free. But, you would be reducing the amount of the unified exclusion that is available to you. It is worthwhile to point out the fact that you can pay school tuition of students free of the gift tax, and you can also pay the medical expenses of others without incurring any gift tax responsibility.
How Large of an Estate Can Pass Federal Estate Tax Free in Iowa?
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PORTABILITY OF ESTATE TAX EXCLUSION One positive change that came out of the tax relief act that was passed at the end of 2010 was the portability of the federal estate tax exclusion. Prior to 2011 the estate tax exclusion was not portable between spouses. In other words, if you predeceased your spouse he or she could not use the exclusion that was allotted to you. Since 2011 the estate tax exclusion has been portable, and a surviving spouse can use the exclusion that his or her deceased spouse was entitled to. You have to file IRS Form 706 to take advantage of this portability.
FEDERAL ESTATE TAX MARITAL DEDUCTION When you are attempting to explain how much you can pass free of the estate tax you must touch upon the unlimited marital deduction. Married people can transfer any amount of money between one another free of transfer taxes. You can give unlimited tax-free gifts to your spouse while you're living, and you can bequeath any amount of property to your spouse without incurring any estate tax liability. The caveat here would be that the surviving spouse must be an American citizen. The IRS wants to get some money eventually. If your spouse was a
How Large of an Estate Can Pass Federal Estate Tax Free in Iowa?
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citizen of another country he or she could take his or
About Dennis Duffy
her inheritance to that country. As a result, the unlimited marital deduction is not available to a noncitizen spouses.
CONCLUSION The federal estate tax is certainly a threat to your financial legacy. And, it can be imposed multiple times on the same wealth as it is passed down over succeeding generations. As disturbing as this may be, there are legal steps that can be taken to reduce your exposure. The best way to explore them is to discuss wealth preservation strategies with a licensed estate planning attorney.
REFERENCES Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-SelfEmployed/Estate-and-Gift-Taxes Forbes http://www.forbes.com/sites/deborahljacobs/2013/01/0 2/after-the-fiscal-cliff-deal-estate-and-gift-taxexplained/
How Large of an Estate Can Pass Federal Estate Tax Free in Iowa?
Dennis Duffy combines an extensive background in business with a wide range of legal experience to provide his clients with a uniquely practical perspective. An attorney since 1989, he practices primarily in Estate Planning, Wills, Trusts and Probate. Mr. Duffy also offers frequent educational seminars on a variety of estate planning topics to both the general public and private groups in the Quad Cities area.
Duffy Law Office
www.duffylawoffice.com 1840 E. 54th Street Davenport, IA 52807 (563) 445-7400 info@duffylawoffice.com
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