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The amount you can leave to your heirs federal estate tax free is on the rise.

Source: IRS Announces 2016 Estate And Gift Tax Limits: The $10.9 Million Tax Break – Forbes

Forbes’ headline is misleading. In the last paragraph, they admit that planning for couples is tricky. Without proper planning and execution, you may not be able to benefit from possible “portability” of the deceased spouse’s unused exclusion amount.*

So most planners will conservatively plan on only one exclusion amount which is “on the rise” due to annual inflation adjustment to $5.45 million for 2016 (up from $5.43 million in 2015). (“On the rise” may also be misleading because real inflation may be more than the government admits.) The estate and gift tax exclusions are “unified” with one lifetime exclusion amount covering both. The exemption for generation skipping transfer (GST) tax is for the same amount and also increases to $5.45 million, but there is no portability with GST exemption.

The annual gift tax exclusion remains stuck again at $14,000 as it has been since 2013 (moves in $1000 increments and still not enough inflation to budge, at least according to the government).

Here are the figures from the IRS:

  • The annual exclusion for gifts is $11,000 (2004-2005), $12,000 (2006-2008), $13,000 ( 2009-2012) and $14,000 (2013-2016).

  • The applicable exclusion amount for gifts is $1,000,000 (2010), $5,000,000 (2011), $5,120,000 (2012), $5,250,000 (2013), $5,340,000 (2014), $5,430,000 (2015), and $5,450,000 (2016).

A sophisticated and flexible planning method to consider these days for estates in this mid-range up to $11 million (and often even below one exclusion amount) is the Clayton election which allows asset protection and other trust benefits while making use of portability to minimize income tax on capital gains as well as estate tax. We would be happy to talk to you about it.

*Actually, there is a sneaky way to get much more than $10.9 million excluded–see our Hitler parody:

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David R. Duringer, JD, LL.M, is a concealed firearm instructor and tax lawyer specializing in business and estate planning. He is managing shareholder at Protective Law Corporation, headquartered in Laguna Hills, primarily serving Orange County and Southern California with a satellite office located in Coronado (San Diego County).

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