In 2010, the tax-free amount that could be transferred during life or death was $5 million; this amount was raised to $5.12 million per person, as an adjustment for inflation, in 2012. If Congress took no action in 2013, this amount was subject to revert back to $1 million, with tax rates increasing from 35% to a 55% for many estates. Congress acted in 2013 and made this estate tax exclusion permanent; and on January 11, 2013, with an adjustment for inflation, Congress increased the amount to $5.25 million.
The 2010 tax law allowed for portability of the tax break from one spouse to the other, which the new law has also made permanent. This allows spouses to transfer up to $10.5 million tax-free. However, portability is not automatic. The executor or trustee handling the estate of the spouse who died must transfer the unused exclusion to the surviving spouse by filing an estate tax return after the first spouse dies, even if no tax is owed. This return is due nine months after death with a six month extension allowed. The surviving spouse loses the right to portability if the executor doesn’t file the return; thus, be careful not to miss the deadline. It is advisable to file the form even if they’re not wealthy currently, because future finances are unknown.
The lifetime gift tax exclusion and the estate exclusion are one amount – currently $5.25 million per person. If this limit is exceeded, tax of up to 40% is due. The IRS expects spouses to keep track and report these lifetime gifts. For example if $1 million was given in lifetime gifts, the exclusion remaining will be 4.25 million in 2013. However, there are lifetime gifts that don’t count. Gifts can be given to another person up to $14,000 per year without counting against the lifetime exemption. For example, a married couple with a child who is married with three children can make a joint gift of $28,000 to each of the five people and provide the family with $140,000. Gifts that exceed the limit count against the lifetime exclusion.
The annual exclusion can be used to give assets to as many individuals as you desire or to put money into a Section 529 education savings plans to help relatives save for college. However, review how this affects financial aid and other issues.