THE ESTATE TAX CONCERN
One concern that clients have when preparing their wills is the possibility of state and federal death taxes. People see ads by attorneys, financial planners and others promising to save death taxes through planning. Thus, many of us assume that we have an estate tax problem. So, let’s talk about the issue in real terms. First of all, transfers to one’s spouse are tax free. Secondly, North Carolina does not have an estate, inheritance or gift tax. On the other hand, there are federal estate and gift taxes. However, the 2016 federal exemption amount is $5.45 million per person. With some planning, the unused portion of a deceased spouse’s exemption amount can be transferred to the surviving spouse. This is known as “portability”. Thus, together, a married couple can pass about $11 million to their beneficiaries, estate tax free. The federal exemption amount is indexed each year for inflation and has increased from a 2013 base year amount of $5.0 million per person to the 2016 level of $5.45 million per person.
In addition to the federal exemption and “portability”, there is an annual exclusion from federal gift taxes of $14,000 per donee, which exclusion is also subject to annual indexing for inflation. Thus, in 2016 you can give $14,000 to an unlimited number of people without incurring a gift tax. If married, your spouse can join in your 2016 gift(s) and increase the annual exclusion amount to $28,000 per donee.
In addition to the federal exemption and the annual gift exclusion amount, you can also make the following gifts without triggering federal gift taxes: spousal gifts, charitable gifts, gifts to political organizations, gifts of educational expenses covering tuition, and in some instances, gifts of medical expenses paid directly to the medical facility. (Note: Before proceeding with any of these, talk with your tax preparer.)
There are many reasons for estate planning but for most of us, the concern over potential estate or inheritance taxes is not one of them. I have often told clients who are relieved to know that the state is not going to “take all their assets when they die through taxes”, to come back to see me when they win the lottery. I am still waiting for my first lottery winner, and when that happens, I certainly hope that it is me.