In recent years, the federal estate tax exemption has made headlines as the exemption level has fluctuated greatly from no tax in 2010 to $5 million exemption in 2011. In 2013, the exemption became permanent at $5.25 million (adjusted for inflation) for individuals and $10.50 million for couples who timely file the required estate tax return after the death of the first spouse. These exemptions amounts are determined by the date of an individual's death.
The federal estate tax exemption takes into account gifts given both during the individual's lifetime at upon his death as well as generation-skipping transfers. That means that upon an individual's death, the total exemption is reduced by the total amount of the gifts given during his lifetime and generation skipping transfers.
The annual exemption in 2013 is $14,000 (adjusted for inflation) per recipient or $28,000 from a married couple to each recipient. A generation skipping transfer is a transfer of property from one individual to another individual who are two generations apart (e.g. grandparent to grandchild) or from an individual to another 37.5 years the transferrer's junior.
Through portability and proper planning, a surviving spouse may be able take advantage of the other spouse's tax exemption. Through effective estate planning, individuals and couples can minimize the tax liability incurred by their estates; therefore it is important to consult with your estate planning attorney to determine how to minimize your estate tax liability.