Some interesting recent changes in estate tax planning rules will be useful for individuals and families with relatively high net worth or those who have set aside money or invested in order to gift future generations or hand down money through an estate process.
Sources like MoneyWatch are going over the details of new expansions on tax-free gifts that are going to apply in 2014. These include a hike in the overall unified estate and gift tax exclusion amount -- from $5.25 million to $5.34 million.
A similar increase was made for generation-skipping transfer tax exemptions, MoneyWatch reported. The federal government also expanded the foreign earned income exclusion, though by a relatively small amount, from $97,600 to $99,200 -- a rise of $1,600, or approximately 1.5%.
The new rules for general annual gift exclusions will have a $14,000 cap, which is significantly up from previous years; as late as 2000, the cap was still at the round number of $10,000, which shows it has been rising rapidly since then. Another change involves larger annual gifts to noncitizen spouses, where the annual exclusion is an astounding $145,000.
Practical applications to estate tax planning
For many families, the increase in annual gift exclusions is going to be more immediately practical than the overall estate tax number. Not many families have anything approaching the range of $5 million, which is now adequately covered by overall exclusions.
For individuals who want to bestow more of their wealth during their lifetime, the annual gift exclusion is actually a relevant detail. It shows what is tax-compliant in terms of transferring smaller amounts of money each year, rather than waiting until the estate-handling process to dole out much larger amounts of capital.
Most families are off the hook for federal estate taxes
What these changes reveal is that as officials use items like the Consumer Price Index to push up the estate tax exclusions, the vast majority of estates will be parceled out relatively tax-free.
With that in mind, it's important to note that the estate tax process doesn't cover many different kinds of financial liabilities that tend to diminish or even erase estate capital by the end of an individual's life. Many of these are related to the provisions of Medicare and Medicaid in terms of end-of-life care -- for example, skilled nursing care costs and expenses related to common health conditions for the elderly.
For families that want to preserve as much of an estate as possible, it's critically important to think ahead and address issues related to end-of-life costs before an individual even enters the Medicare system -- or, failing that, before they end up needing the kinds of expensive services that may not be covered by these social safety nets for seniors.
With so much of a political focus on entitlement programs and their continued administration, there's even more of an urgency for families to consider retirement costs as part of a comprehensive way to address estate tax planning. However, it's also necessary to keep a close eye on these kinds of actual federal tax rules on transferring wealth through generations. A family that needs to set up more particular systems to avoid different kinds of financial liability can look at the generation of specialized trusts and custodial accounts that can apply to a multigenerational financial-planning process.
It's also important to look at another piece of the pie, which is retirement investment. Good IRA planning helps to grow capital tax-free; good estate planning helps individuals to preserve the resulting capital for future generations.
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Justin Stoltzfus is a contributor to WiserAdvisor.