In 2011 the Federal Estate Tax exemption goes to $5,000,000 per person.
A generous exemption to be sure. But what if you die 10 or 20 or 30 years from now? With the natural expansion of your assets you could be well above the probate limit before you die. You won't have to pay Federal Estate Tax if both spouses are alive today because there is an unlimited marital deduction which allows you to pass an unlimited estate to your spouse at your death if you are the first to die. It's the second spouse's death they get you on.
If you are a married couple and your assets are near the $5,000,000 mark, you should begin planning now. A Living Trust will effectively double your Estate Tax exemption to $10,000,000 at the death of the second spouse. If both spouses are alive today you will not have Estate Taxes on the first spouse's death, but you must be ready to maximize your allowable exemption on the second spouse's death. A Living Trust can protect your estate from Federal Estate Taxes up to $10,000,000 per couple and even higher with a QTIP provision in your Trust.
Federal Gift Tax rates parallel the Federal Estate Tax schedule at 35%. You cannot gift away more than $13,000 per recipient, per year, or you will be assessed the applicable Gift Tax, and this includes putting your children or others on your deed or your checking account. When you do that you have effectively given them half of that asset and a Gift Tax is applicable. If you don't pay the Gift Tax, your children will have to pay it, along with all the accumulated penalties and interest.
The gifting provision does, however, apply to both spouses so that both of you may gift away up to $13,000 per year to as many recipients as you like without Gift Tax. Remember that each of you (spouses) is gifting against your once-in-a-lifetime exemption of $5,000,000 without a Living Trust or $10,000,000 with a Living Trust in 2011.
You may gift all $5,000,000 away during your lifetime, but remember that if you do that, it is used up and you have no exemption left when you die. You only get a once-in-a-lifetime exemption for Estate Taxes. You may use it up while you are alive by gifting it away, or you may use it at your death. Most Americans never approach the $5,000,000 net asset mark, and for those individuals there are no worries about this tax.
Keep your eyes on future legislation regarding the Gift Tax. Only about 2% of Americans pay an Estate Tax at their death. The current administration is pushing legislation to totally eliminate the Death Tax but so far only interim legislation has been achieved. The Death or Estate Tax is unarguably the most unfair tax in existence. Still the political money grab in Washington makes it appealing to liberal legislators.