FEDERAL ESTATE TAX: HOW MUCH CAN A KENTUCKY RESIDENT PASS TAX-FREE?

You Have To Understand the Estate Tax Parameters to Plan Your Estate Effectively As A High Net Worth Individual

PAMELA H. POTTER
KENTUCKY ESTATE PLANNING ATTORNEY THIS IS AN ADVERTISEMENT.

You have to understand the estate tax parameters to plan your estate effectively as a high net worth individual. A number of states have an estate tax on the state level. Fortunately, the only estate tax that you must concern yourself with if you are a resident of the state of Kentucky is the federal estate tax. (This is assuming you don't own property in a state that has a state level estate tax.) There is a particular amount that you can pass to your heirs tax-free. This amount is defined by the amount of the federal estate tax exclusion that is in place at the time of your death. At the time of this writing in 2013 the exact amount of the federal estate tax exclusion is $5.25 million. The maximum rate of the tax sits at 40% at the present time.

PERMANENT OR TEMPORARY?
If you have been following the ongoing changes to tax laws over the last few years, you are aware of the fact that the estate tax parameters have been in flux. They have been put into place through the passage of tax relief acts that had sunset or expiration dates. The current estate tax parameters are in place because of provisions contained within the American Taxpayer Relief Act of 2012. The parameters that we have as a result of the passage of this act do not have an expiration date. For this reason you will hear people talking about the current parameters being permanent. In truth, they are not really permanent in the literal sense. If legislators decide to change the parameters of the estate tax, and if the president signs the legislation into law, the lay of the land can indeed change. This is not some hazy possibility. There has actually been a provision included within the 2014 White House budget that would alter the existing estate tax
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parameters. This provision would set the exclusion and the maximum rate back to the 2009 figures. At that time the exclusion was $3.5 million, and the maximum rate was 45%. Just because this has been proposed does not mean that it will become a reality. Lawmakers with an entirely different perspective have introduced legislation over the years that would repeal the estate tax entirely. The thing to take away from this is that you don't want to be overconfident if you are not exposed to the estate tax at the present time. The laws can change, and your own financial situation can improve significantly. Many people procrastinate a great deal when it comes to estate planning. When they finally take the plunge they breathe a sigh of relief feeling as though they have finally taken care of this responsibility. They store the documents for safekeeping and forget about the matter. Over the years the estate plan that you have in that lockbox, filing cabinet, or safe deposit box may become obsolete. You have to be prepared to make provisions on an ongoing basis if you always want to be optimally prepared as things change within your life and throughout society as a whole.

CLARITY ON MARRIED COUPLES

There are some things to understand about the estate tax as it applies to married couples. The $5.25 million exclusion that we speak of is allotted to each individual American taxpayer. As a result, you and your spouse could combine your respective exclusions. As a partnership you would have a total of $10.5 million in 2013.

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Furthermore, the estate tax exclusion is portable. If you die while your spouse is still alive he or she could use your exclusion and his or her own exclusion. You don't have to use any of your $5.25 million exclusion to leave behind assets to your spouse in a tax-free manner. The estate tax is not imposed on asset transfers to your spouse as long as your spouse is a citizen of the United States. Normally, the tax man feels as though he will get his money eventually if your surviving spouse inherits your assets tax-free because your spouse will die someday. Non-citizens are treated differently because if your spouse were a citizen of a foreign country, he or she could simply go back home and the IRS may never receive anything.

GIFT TAX
The estate tax is not the only tax on asset transfers in the United States. There is also a federal gift tax, and it is said to be unified with the estate tax. It carries the same 40% top rate, and the $5.25 million exclusion is a unified exclusion that applies to taxable gifts that you give while you are alive plus the value of your estate. Because of the existence of the gift tax you can't just give away gifts tax-free while you are alive in an effort to avoid the estate tax.

CONCLUSION
To summarize all of the above, we have a federal estate tax. It is imposed on asset transfers that exceed $5.25 million in value. The top rate of the tax in 2013 is 40%. There is also a gift tax that carries the same rate, and the exclusion encompasses taxable gifts that you give in combination with your estate's value.
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It is possible to position your assets in a way that provides estate tax efficiency. The best way to do this will depend on the circumstances. If you have estate tax concerns you should certainly retain the services of a licensed estate planning attorney. These attorneys can recommend tax efficiency strategies that will preserve your wealth for the benefit of your loved ones.

REFERENCES
Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-andGift-Taxes Forbes http://www.forbes.com/sites/deborahljacobs/2013/01/02/after-the-fiscal-cliffdeal-estate-and-gift-tax-explained/

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About the Author

Pamela H. Potter
Owner and founder of the Ashland, Kentucky based Potter Law Firm, Ms. Potter concentrates her practice in the area of estate planning, estate administration, and elder law. Mrs. Potter's goal is to help her clients plan secure financial futures for themselves and their families. To achieve that goal, her firm offers a wide range of estate planning services, including wills, trusts, and powers of attorney in addition to probate, estate administration, elder law, and Medicaid Planning services. Experience Ms. Potter spent three years in the public section and 15 years practicing in general practice law firms before founding her own firm in 2000. She is a member of the American Academy of Estate Planning Attorneys, the National Academy of Elder Law Attorneys, the Huntington Estate Planning Council, the Real Property, Probate and Trust section of the American Bar Association, the Probate and Trust Law Section of the Kentucky Bar Association, and the Kentucky Bar Association Elder Law Committee.

The Potter Law Firm www.potterestateplanning.com ASHLAND 1620 Carter Avenue Ashland, KY 41105-2591 Phone: (606) 324-5516 Fax: (606) 324-4766 NORTHERN KENTUCKY 3940 Olympic Boulevard Suite 400 Erlanger, KY 41018 Phone: (859) 372-6656 CHARLOTTE 15720 John J. Delaney Dr., Suite 300 Charlotte, NC 28277 Phone: (704) 944-3245 This is an advertisement.

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