Ways the estate tax exemption may affect your estate planning

Readers may have questions about the estate tax exemption, such as the current exclusion limit, how it is calculated, and ways that it might impact their estate planning.

The current exclusion amount is found on the Internal Revenue Service’s website: It will be $5,430,000 in 2015. In terms of estate planning, what that figure means is that the IRS will assess an estate tax only on the portion of a decedent’s estate that exceeds the exemption ceiling.

Keep in mind that an accounting of an estate may involve several steps. First, a decedent’s gross estate is computed by taking an accounting of all assets in the estate, including real estate, annuities, securities, business interests and personal property.

However, an estate may be entitled to certain deductions that would lower the taxable portion of the estate. For example, certain debts, mortgages, estate administration expenses, and transfers of property to surviving spouses or qualified charities may lower an estate’s net value. Conversely, lifetime taxable gifts made after 1977 may have to be added to the estate’s value before arriving at the taxable estate amount. Estate values that exceed $5.43 million will have to file an estate tax return and pay tax on the portion that exceeds the exclusion amount.

However, a fairly recent IRS rule may allow some surviving spouses to apply an even higher exemption amount to their estate. The rule, sometimes referred to the portability election, allows any unused portion of the exemption to pass to the surviving spouse. However, the portability is not automatic. A surviving spouse must make an election on an estate tax return filed within the applicable time limit.

To learn more, visit the estate planning section of our firm’s website.

Source: Internal Revenue Service, “Estate Tax,” Nov. 17, 2014