The estate tax can be devastating to your legacy, and it is important to take steps to mitigate your exposure for the well-being of your loved ones. At the present time the estate tax exclusion is $5 million but it is scheduled to be reduced to $1 million in 2013 if there are no changes made in the meantime. Believe it or not, the maximum rate of the tax is scheduled to go up to 55% at that time. So for example, if you had a $5 million estate $4 million of it would be subject to a 55% tax. If you do the math that equals $2.2 million. So out of the $5 million that you were able to accumulate throughout your lifetime, your family members would receive $2.8 million and the government would receive $2.2 million.
Of course it is logical to simply give gifts to your loved ones while you are alive in an effort to avoid the estate tax, but there is a gift tax in place as well that is unified with the estate tax. Because of this unification, even though there is a $5 million lifetime gift tax exclusion at this time, it really does you no good because any portion of it that you use to give gifts will be deducted from your available estate tax exemption.
There are however additional exemptions that do not impact this unified exclusion and one of them enables you to pay the college tuition of an unlimited number of students equaling any amount of money free of the gift tax. It should be noted that this exemption does not allow you to pay for living expenses, books and fees. However, there is a $13,000 per person annual exemption that does not impact the lifetime unified exclusion. So you could utilize this to help to cover these costs, and if you are married you and your spouse could combine your respective exemptions and provide your student with as much as $26,000 per year.