People who have been able to accumulate a significant store of wealth should be very aware of federal transfer taxes. In this post we will look at an often overlooked tax called the generation-skipping transfer tax. However, to understand the generation-skipping transfer tax, you need some background information about the the estate tax and the gift tax.
Federal Death Tax
The federal estate tax carries a 40 percent maximum rate, and this is an attention-getting number. There is a federal estate tax credit or exclusion of $5.34 million in 2014. You can transfer as much is $5.34 million tax-free. Transfers that exceed this amount are potentially subject to the federal estate tax.
We should point out the fact that there is an unlimited marital deduction. This $5.34 million exclusion would be used to leave tax-free bequests to people other than your spouse. Because of the unlimited marital deduction, you can leave any amount of property to your spouse free of the estate tax, as long as your spouse is an American citizen.
Federal Gift Tax
In addition to the federal estate tax, there is a federal gift tax. The estate tax was enacted in 1916, and at that time, there was no gift tax. What would you do under these circumstances? You guessed it, you would give assets to your loved ones while you were still living to avoid the estate tax.
This loophole was closed temporarily when the gift tax was first enacted in 1924. It was repealed in 1926, but it was reenacted 1932. The tax has been in place ever since, and it was unified with the estate tax in 1976.
The $5.34 million is a unified lifetime exclusion. It applies to lifetime gifts along with the estate that you are passing along to your loved ones. If you use part of your unified exclusion to give gifts while you are living, you are reducing the amount that will be left to apply to your estate.
Generation-Skipping Transfer Tax
Now that we have provided the necessary background information, we can explain the generation-skipping transfer tax. This tax was enacted in 1976 when the gift tax and the estate tax were unified.
It also closes a loophole. This tax prevents people from creating certain types of trusts that would facilitate estate tax avoidance.
The generation-skipping transfer tax is potentially applicable on asset transfers to family members who are more than one generation younger than you. This tax could also be levied on transfers to unrelated individuals who are at least 37.5 years younger than you are.
Learn More About Transfer Taxes
If you are concerned about federal transfer taxes, we would be glad to answer your questions and make recommendations. To schedule a consultation, send us a message through this page: Indianapolis IN Estate Planning Attorneys.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.