For most people, thinking about estate taxes conjures up
images of the ultra-rich. Yet even with provisions that
permanently set the level at which estate taxes kick in at a
fairly high amount, you should still know how the tax can affect
you. Let's take a look at four key provisions of the estate tax
for 2014 that could help you avoid a big mistake that could hurt
your family's financial future for generations to come.
1. Higher exclusions will apply to the estate tax in
Early this year, lawmakers agreed to set the level at which
estate taxes kick in at $5.25 million, avoiding expiring
provisions that would have sent the exclusion down to just over
$1 million. But one of the biggest improvements in the estate-tax
laws is that the exclusion amount was set to adjust with
inflation. As a result, the estate tax in 2014 won't apply for
estates under $5.34 million.
Because the exclusion amount is unified between the estate tax
and the associated gift tax, you don't have to wait until death
to take advantage of higher exclusion amounts. You can make
tax-free lifetime transfers as well, with the amount of any gift
exceeding $14,000 counting against the $5.34 million amount.
IRS Building. Image source: Wikimedia Commons.
2. What's included can surprise you.
Unfortunately, figuring out which of your assets is subject to
estate tax isn't as simple as adding up all the balances on your
various accounts and getting valuation appraisals on your
property. In some cases, you also have to take into account money
that isn't even yours yet.
The biggest surprise for many people is that life insurance
proceeds are often includible in taxable estates even if the
benefits go directly to beneficiaries rather than passing through
the estate's probate proceedings. Often, you can avoid that
result by setting up life-insurance trusts, which insurance
companies from industry giants
down to even relatively small players can usually help you with.
Still, trusts come with their own complications, making it
necessary to weigh the pros and cons to decide whether they're
right for you.
3. It's easier for married couples to preserve their full
estate tax benefits.
Another benefit from recent tax legislation is that couples no
longer have to worry about losing part of their joint exclusion
amount in the event of their untimely death. Each member of a
couple is entitled to the $5.34 million exclusion, but in the
past, estate planners used to have to take extraordinary measures
to preserve the exclusion of the first spouse to die.
Now, with so-called portability provisions, it's easier for
surviving spouses to preserve such exclusions for later use
simply by filing an estate tax return at the death of the first
spouse. That enables the surviving spouse to double the exclusion
amount without necessarily having to use complicated trusts or
other techniques, even though such tactics can still produce
favorable results in many cases.
4. State limits for estate tax in 2014 can differ
markedly from federal limits.
Many people don't realize that the estate tax isn't just a
federal concept. Many states also charge estate taxes, and some
of them have much lower limits at which their taxes apply. New
Jersey has the lowest estate-tax limit at just $675,000, but
several other jurisdictions, including New York, Rhode Island,
Massachusetts, Maryland, Minnesota, and Washington, D.C., have
limits of $1 million or less. That makes it essential to plan for
a potential state-level estate tax beyond even if you fall well
below the federal limit for estate tax in 2014.
The estate tax in 2014 won't affect as many people as it once
did, but it's still complicated enough to pay close attention to.
Being smart about your potential estate tax liability could help
you find ways to make sure it never affects you and your
Be smart about your taxes
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