The federal estate tax can take a heavy toll on your legacy if you have enjoyed a significant degree of financial success. This levy carries a 40 percent maximum rate, so it can really erode your legacy if you are exposed to it.
Fortunately, most Americans do not have to pay the tax, because there is a high credit or exclusion. The exclusion is the amount that can be transferred before the estate tax would become applicable.
At the time of this writing, it is over $12 million. We are not giving a more specific figure because it is adjusted annually to account for inflation. To be clear, the exclusion amount can be transferred tax-free, and the estate tax would be applied on the rest of the assets that are being transferred.
There is an unlimited marital deduction that allows you to transfer any amount of property to your spouse free of taxation. It should be noted that this marital deduction is only allotted to people that are American citizens.
The estate tax exclusion is portable between spouses. This means that a surviving spouse would be allowed to use the exclusion that was allotted to their deceased spouse.
Federal Gift Tax
Unfortunately, you cannot give large gifts to your loved ones to avoid the estate tax, because a gift tax has been in place continuously since 1932. It was unified with the estate tax during the 1970s, so the exclusion is a unified exclusion that includes your estate along with your lifetime gifts.
However, there is another gift tax exclusion that you can utilize to transfer as much as $17,000 to any number of gift recipients within a calendar year in a tax-free manner. There is no limit to the amount that you can give in total, as long as you do not give more than $17,000 to any one person.
If you were exposed to the estate tax, this exclusion can be used to transfer a significant amount of money if you take advantage of it over an extended period of time. Each individual gets an exclusion, if you are married, you and your spouse could give a total of $34,000 to an unlimited number of people annually.
In addition to this annual exemption, there is also an educational exclusion. Taxpayers are allowed to pay school tuition for students without being taxed for their generosity.
The payments must be made directly to the school, and the exclusion does not cover books, fees, and living expenses. This being stated, you could use your $17,000 per person annual exclusion to provide additional support.
Another gift tax exemption allows you to pay medical bills for others free of the gift tax. It applies to the payment of health insurance premiums along with services rendered. Once again, you make the payments directly to the health care service provider or insurance company.
South Carolina Estate & Gift Tax
There are some states in the union that have state-level estate taxes. In these states, the exclusions are often much lower than the federal exemption. As a result, a person could be exposed to a state estate tax even if they are federally exempt.
Here in South Carolina, we do not have to worry about paying state estate taxes, because we don’t have this type of tax. That’s the good news, but the bad news is that the tax would apply to you if you own property in a state that has an estate tax.
An inheritance tax and an estate tax are structurally different. As we have stated, an estate tax is levied on the taxable portion of an estate before it is transferred to the heirs. With an inheritance tax, each individual nonexempt inheritor can be forced to pay the tax.
We do not have a federal inheritance tax in the United States, but a small handful of individual states do have this form of taxation. South Carolina is not one of them.
Other State Estate Taxes
Many of our clients have real estate and property in other jurisdictions. It is important to let your estate planning attorney know about these assets which may be subject to another state’s taxes.
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If you have concerns about estate tax liability, we can help you put a tax efficiency plan in place. And of course, our doors are open even if you do not have to worry about the estate tax.