Most Families Do Not Have to Pay the Federal Estate Tax Because of the Existence of the Federal Estate Tax Exclusion

WHAT IS THE UNLIMITEDMARITAL

ESTATE TAX DEDUCTION IN INDIANA?

PAUL A. KRAFT Indiana Estate Planning Attorney

What Is the Unlimited Marital Estate Tax Deduction in Indiana? www.FrankKraft.com 2

This paper will focus on some details about the unlimited marital estate tax deduction. However, before we examine the deduction, we should provide some background about federal transfer taxes.

FEDERAL ESTATE TAX

When you bequeath assets to your heirs, these transfers are potentially taxable. Most families do not have to pay the federal estate tax because of the existence of the federal estate tax

credit or exclusion. In 2014, the amount of the federal estate tax exclusion is $5.34 million. If your estate does not exceed $5.34 million in value, it will not be

exposed to the federal estate tax this year. On the other hand, if you are transferring more than $5.34 million,

the estate tax would potentially be applicable. This $5.34 million exclusion is derived from a base of $5 million put into place

for the 2011 calendar year. Since then, there have been ongoing adjustments to account for inflation. Next year, the exclusion may go up after another inflation adjustment has been applied. The maximum rate of the federal estate tax at the time of this writing is 40 percent.

When you digest these figures, you should recognize the fact that changes to tax laws are always possible. If you read this today and go forward thinking that you will never be exposed to the estate tax if your assets do not exceed $5 million or so, you are making a mistake.

In fact, the budget that was proposed by the White House for 2015 calls for a reduction in the amount of the estate tax exclusion. Under this proposed budget, the estate tax exclusion would be reduced to just $3.5 million beginning in 2018. It would also raise the top rate of the tax to 45 percent.

What Is the Unlimited Marital Estate Tax Deduction in Indiana? www.FrankKraft.com 3

When you develop an ongoing relationship with a licensed estate planning attorney, you can always be kept abreast of any changes that may come down the pike.

FEDERAL GIFT TAX

In addition to the federal estate tax, there is also a federal gift tax. There is a $14,000 per year annual gift tax exclusion. The first $14,000 that you give to anyone within a given year can be given tax-free. Any additional gift that you

give to any one person would be subject to the gift tax. Because the estate tax and the gift tax are unified under the tax code, the $5.34 million exclusion applies to gifts that you give coupled with the value of your estate. If you gave a gift to someone within a calendar year that exceeded $14,000, you could use a portion of your $5.34 million unified lifetime exclusion

to give the gift in a tax-free manner. The bottom line is this: you can't give away unlimited assets while you are living to avoid the estate tax. There is, however, a caveat to that statement.

UNLIMITED MARITAL ESTATE TAX DEDUCTION

We have an unlimited marital estate/gift tax deduction in the United States. If you are legally married in the eyes of the law, you could use this unlimited marital deduction to transfer unlimited assets to your spouse free of all transfer taxes. It should be noted that your spouse must be an American citizen if you want to use this unlimited marital deduction. The powers that be do not want a non-citizen spouse to simply return to his or her homeland, tax-free inheritance in tow. However, there is an estate planning tool that is used to gain estate tax efficiency if you are married to someone who is a citizen of another country. It is called a qualified domestic trust.

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With this type of trust the assets that have been conveyed into it are not subject to the estate tax right away. The surviving spouse

would receive income from the trust throughout his or her life, and this income would not be subject to the estate tax. Under some circumstances the survivor could draw from the principal as

well.

When the surviving spouse dies, the subsequent transfer of the assets that remain in the trust would be subject to the estate tax. However, the surviving spouse received income for life that was derived from the earning power of the entire estate.

CONCLUSION

There is a federal estate tax in place, and it is unified with the gift tax. At the

current time, the maximum rate of these taxes is 40 percent. In 2014 the amount of the unified gift and estate tax exclusion is $5.34 million. If you transfer assets that exceed this amount, the transfers are taxable unless you are transferring assets to your spouse.

Transfers to your spouse are not subject to taxation because of the unlimited marital deduction. If you are exposed to transfer taxes, there are tax efficiency strategies that can be implemented. To explore your options, arrange for a consultation with a licensed estate planning lawyer.

What Is the Unlimited Marital Estate Tax Deduction in Indiana? www.FrankKraft.com 5

REFERENCES

Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-and-

Gift-Taxes Forbes (updated for 2014) http://www.forbes.com/sites/deborahljacobs/2013/11/01/the-2013-limits-on-tax-free-gifts-what-you-need-to-know/

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About the Author Paul A. Kraft

Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law

firms in Indiana in the area of estate planning as well as business and tax planning.

Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and

state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.

In addition to his practice, Mr. Kraft has lectured extensively in the areas of living trust planning, Medicaid planning, and

presenting public and private seminars on the importance of proper estate planning. He has also authored various articles

on estate planning and is a contributing author of LEGACY: Plan, Protect, and Preserve Your Estate–Practical Answers from America’s Foremost Estate Planning Attorneys.

Mr. Kraft is a co-founder of the Indiana Network of Estate Planning Professionals, a charter member of the American Academy of Estate Planning Attorneys and a founding member of the National Network of Estate Planning Attorneys. He is

also a member of the Indianapolis Bar Association, including the Taxation, Business Law and Estate Planning sections; the Indiana State Bar Association, including the section on Taxation

Law; the Indiana CPA Society; and the Estate Planning Council of Indianapolis. Mr. Kraft is admitted to practice law before the Supreme Court of Indiana, U.S. District Courts, and U.S.

Tax Court.

Frank & Kraft A Professional Corporation Attorneys at Law www.FrankKraft.com 135 N. Pennsylvania Street Suite 1100 Indianapolis, IN46204-2485 Phone: (317) 684-1100 Fax: (317) 684-6111