When you pass away your remaining assets will be distributed to the beneficiaries of your estate. However, depending on the value of your estate, your estate may have to pay a tax, called an estate tax, for the privilege of giving your assets to your beneficiaries. An Estate Tax is a tax on your right to transfer property at your death. The legal representative of your estate will be required to account for and value every asset you own and report it on an estate tax return to the government. The total value of these assets is called your "Gross Estate" and includes all of your property, such as cash, stocks, bonds, mutual funds, cars, boats, real estate, life insurance, retirement plans, collectible, trusts, annuities, business interests, and anything else you may have held an interest in. This estate tax is assessed against your estate both at the state and federal level.  The federal estate tax rate starts at 40 percent and without careful estate planning your estate could incur a substantial amount in federal estate taxes.

          The federal estate tax that is to be paid is determined by the value of your “Net Estate.” The Net Estate is the value of the Gross Estate reduced by certain permissible deductions. These deductions help reduce the amount of the estate tax to be paid by your estate. First, there is an “unlimited marital deduction” meaning that a married person who leaves his/her assets to a surviving spouse enjoys a “free pass” on any estate taxes.  Any assets passing to a surviving spouse escape federal estate taxation, for the time being.  However, one issue with leaving all of your assets outright to a surviving spouse is that you end up making the surviving spouse’s “pile of assets” bigger.  While the surviving spouse inherits the deceased spouse’s assets without paying a federal estate tax, in actuality, you may be deferring the tax due (and creating a bigger federal estate tax) when the surviving spouse passes away.

          In addition to the marital deduction, the law also provides for an exemption of $5.25 Million on assets passing to a non-spouse.  This exemption is indexed for inflation and may be increased over time. With proper planning, married persons can make use of each of their exemptions and shelter $10.50 Million from federal estate taxation.  However, in order to accomplish this, careful estate planning needs to be done.

          A recent change in the law now provides for the “portability” of a deceased spouse’s unused federal exemption amount.  This is a relatively new law and provides a significant benefit to married persons.  Prior to the enactment of this law, if a married person did not use all of his/her federal exemption amount ($5.25 Million) then that exemption amount was lost.  Now, under the current law, the surviving spouse can “claim” that unused exemption and use it later on to shelter additional assets from federal estate taxation.  However, the law regarding “portability” is very specific and is not automatic.  Care has to be taken in order to receive the benefit of the portability provisions.

          If you would like to discuss your legal matter with one of our attorneys please contact this office and arrange for a free initial consultation. Our experienced attorneys can assist you with your legal needs.