There are taxes on large asset transfers in the United States. This is something to take into consideration when you are planning your estate. There is a federal estate tax, a federal gift tax, and there is also the generation-skipping transfer tax. To understand one, you have to understand the others. In this post we will examine these federal transfer taxes.
Federal Estate Tax
If you have been particularly successful from a financial perspective, the federal estate tax may be a factor for you. To determine whether or not you are exposed to the estate tax, you must compare the value of your assets to the amount of the federal estate tax credit or exclusion. Any portion of your estate that exceeds the amount of this exclusion would potentially be subject to taxation.
For the rest of the 2014 calendar year, the federal estate tax exclusion stands at $5.34 million. There are annual adjustments to account for inflation, so you may see a somewhat higher figure next year.
The maximum rate of the federal estate tax is 40 percent at the present time.
Federal Gift Tax
In addition to the federal estate tax, we also have a federal gift tax. This tax is in place to prevent people from giving gifts while they are living to avoid the estate tax.
When the estate tax was first enacted in 1916, there was no gift tax, and a loophole existed. The powers that be eventually enacted a gift tax to close that window of opportunity.
The estate tax and the gift tax are unified. As a result, they share the same top rate, and the $5.34 million exclusion encompasses your estate along with the gifts that you give while you are living.
Generation-Skipping Transfer Tax
There is also a generation-skipping transfer tax. This tax is unified with the other federal transfer taxes, so it carries the same maximum rate. The $5.34 million unified exclusion also applies to the generation-skipping transfer tax.
The generation-skipping transfer tax can be applicable on asset transfers to family members who are more than one generation younger than you are. It can also be levied on transfers to people who are not related to you who are at least 37.5 years younger than you.
This tax would typically come into play if you were to create a trust for the benefit of a much younger beneficiary.
Transfer Tax Efficiency Consultation
In this post we have provided a basic overview. If you potentially are exposed to federal transfer taxes, you probably have some detailed questions.
Our firm offers free wealth preservation consultations, and we would be glad to provide you with answers. To request a consultation, send us a message through the contact page on this website.