There can be some confusion about taxes that could be applicable when assets are changing hands. In this post we will look at transfer taxes and provide some explanations.
Many people think that an inheritance tax and an estate tax are one and the same thing. In fact, this is not the case at all.
An inheritance tax would be levied on transfers to each individual nonexempt inheritor. It would not be levied on the whole before the assets are transferred to the heirs to the estate.
On the federal level, there is no inheritance tax to contend with, and this is certainly a positive. However, there are seven states in the union that impose state-level inheritance taxes.
We practice law in the state of California. There is no state-level inheritance tax in California. For your information, the states that have inheritance taxes are Kentucky, New Jersey, Maryland, Pennsylvania, Nebraska, Indiana, and Iowa.
You may want to take this into consideration if you are considering relocation to any of these states.
Federal Estate Tax
There is a federal estate tax that is applicable in all 50 states. An estate tax would be imposed on the entire taxable portion of the estate before the heirs receive their inheritances.
During the 2014 calendar year, the estate tax exclusion stands at $5.34 million. This is the amount that you can transfer free of taxation. The maximum rate is 40 percent.
There is an unlimited marital estate tax deduction. You would be using a portion of your $5.34 million unified lifetime exclusion to leave bequests people other than your spouse. Because of the unlimited marital deduction, you can transfer any amount of money to your spouse tax-free.
Federal Gift Tax
In addition to the federal estate tax, there is also a federal gift tax. These two taxes are unified. The $5.34 million exclusion applies to lifetime gifts that you give along with the value of your estate as it is being passed on to your heirs.
However, there is an additional annual gift tax exclusion. This exclusion allows you to give up to $14,000 to an unlimited number of gift recipients each year without incurring any gift tax exposure.
To be clear, this exclusion is completely separate from the unified lifetime exclusion.
Generation-Skipping Transfer Tax
We also have a generation-skipping transfer tax. This tax is potentially applicable on asset transfers to family members who are at least two generations younger than you. It can also be applied to transfers to non-family members who are at least 37.5 years your junior.
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If you would like to discuss taxation with an experienced and qualified estate planning attorney, we can help.