There is a federal estate tax credit or exclusion. This is the threshold that divides the taxable portion of your estate from the part that is exempt from taxation. At the time of this writing late in 2015, the federal estate tax exclusion stands at $5.43 million.
Since the end of the year is right around the corner, the Internal Revenue Service has announced some updated figures for 2016. Next year, an inflation adjustment will be added to the federal estate tax exclusion, bringing it up to $5.45 million.
Exclusion Portability
You may wonder if your surviving spouse could use your estate tax exclusion along with his or her own exclusion after you pass away. This situation is called portability in an estate planning context.
Prior to the 2011 calendar year, the estate tax exclusion was not portable between spouses. Essentially, when someone died, his or her exclusion died as well.
When you apply simple logic, this does not seem fair. Let’s say that you and your spouse are both professionals, and you both work hard throughout your lives. Each of your families passed along inheritances, and between the two of you, you have been able to accumulate a significant store of wealth.
Since two people contributed to the accumulation of this wealth that comprises the family estate, why would the surviving spouse have just one exclusion to apply to the estate for tax purposes?
At the end of 2010, a legislative measure was passed that reversed this situation. The exclusion was made portable, but the portability was only in place until the end of 2012, when this piece of legislation was scheduled to expire.
In the eleventh hour in December of 2012, a measure called the American Taxpayer Relief Act of 2012 was enacted. Part of this act made the portability of the federal estate tax exclusion permanent.
Since we are looking at the estate tax exclusion implications for married couples, we should point out the fact that there is a federal estate tax marital deduction. This deduction allows for unlimited tax-free asset transfers between spouses, as long as the people involved are American citizens.
New Jersey State Estate Tax
In addition to the federal estate tax, there are 15 states in the union that impose state-level estate taxes, and New Jersey is one of them. The exclusion in our state is the lowest exclusion on the state level in the country; it stands at just $675,000.
Portability of the estate tax exclusion is not available on the state level, but there is an unlimited marital deduction. Unfortunately the marital deduction, if used as the sole means to transfer assets to the surviving spouse, will result in loss of the first spouse’s $675,000.00 exemption.
Get In Touch
If you would like to discuss your tax situation with a licensed professional, our firm can help. We offer no obligation case evaluations, and you can send us a message through this link to set up an appointment: Warren NJ Estate Planning Attorneys.
Alan Augulis, Estate Planning Attorney
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