When you take a moment to seriously consider the ramifications of the estate tax it can really get your attention. At the present time the top rate of the estate tax is 35%. This can seem like just a number on a page but imagine what your family members could do with this money. You are talking about close to one third of all the taxable resources you have been able to put together throughout the entirety of your life, absorbed by the government in the blink of an eye. And guess what? It is scheduled to get worse before it gets better. Unless the legislators in Washington take some kind of action to change the laws, as they stand right now, the maximum estate tax rate will rise to 55% when 2012 comes to a close.
Your first thought when you hear about this tax might be to consider making gifts to your loved ones while you’re still alive in an effort to keep the money in the family rather than giving anywhere from a third to more than half of it to the IRS. Unfortunately there is a roadblock there as well, in the form of the gift tax, which carries the same 35% rate. There is however a $5 million lifetime gift tax exemption, and of course there is also a $5 million estate tax exclusion. This can leave you thinking that there are two separate exemptions available to you that total $10 million.
The bad news is that this is not the case at all. The estate and gift taxes are considered to be “unified” by the IRS, and this means that the exclusions are unified. Only $5 million is available to you in total. So, if you gave $3 million worth of tax-free gifts during your life you would only have a $2 million estate tax cushion available at your death.
The good news is that the estate tax exclusion is available to each individual. So if you are married you and your spouse would be able to pool your respective exemptions and have a total of a $10 million exemption available. And since the estate tax is now portable your spouse could utilize your unused exclusion after you pass away.