If you have been able to accumulate a significant store of wealth throughout your life you must take steps to mitigate your exposure to federal transfer taxes. Those who do not plan ahead effectively could be doing their family members quite a disservice.
There are taxes on asset transfers in the United States. These levies can dramatically reduce the value of your estate as it is being passed on to your heirs. Gifts that you give to others while you are alive can also be heavily taxed.
We would like to examine the federal transfer taxes here.
Is It Fair?
First, we would like to touch on the question of whether or not the transfer taxes should even exist. The money that you leave behind to your loved ones is a remainder that you have left after paying your taxes throughout your life.
With a gift you are looking at the same equation. You earned income, and you paid income taxes. You give some of was left over to a loved one. What is the logic behind a tax on this gift?
While it may not seem fair, these taxes are in place and it is important to do everything possible to preserve your wealth by positioning your assets in a tax efficient manner.
In 2013, there is a $5.25 million estate tax exclusion. It can be adjusted on an annual basis to account for inflation.
The maximum rate of the federal estate tax this year is 40 percent, and this rate will remain in place unless legislative changes are implemented at some point in time.
Everything that you have that exceeds $5.25 million could be subject to the federal death tax.
It should be noted that there is an unlimited marital deduction. You can give any amount of money to your spouse while you are alive, or arrange for the transfer of any amount of money to your spouse after you pass away, without incurring any transfer tax liability.
The above is true assuming your spouse is an American citizen. The unlimited marital deduction would not extend to a non-citizen spouse.
The gift tax carries the same 40% top rate, and it applies to gifts above the $5.25 million lifetime exclusion amount. You should understand the fact that the gift tax and the estate tax are unified. As a result this exclusion includes your estate and the taxable gifts that you give while you are still alive.
Generation Skipping Transfer Tax
We also have a generation-skipping transfer tax in the United States that carries a 40% maximum rate and a $5.25 million exclusion.
As the name implies, this tax is applicable on transfers of assets to family members who are at least one generation younger than you or non-relatives at least 37.5 years younger than you.