There are taxes on asset transfers in the United States, and you must take steps to gain tax efficiency if you are exposed. We have a federal estate tax, a federal gift tax, and a generation-skipping transfer tax.
Federal Estate Tax
The federal estate tax looms large for high net worth individuals. The maximum rate of this tax is 40 percent.
Everyone does not pay the federal estate tax because there is a credit or exclusion. For the rest of 2014, the exact amount of the federal estate tax exclusion is $5.34 million. This is the amount that can be transferred tax-free. Transfers that exceed this amount could be subject to taxation.
Each year there can be adjustments to account for inflation, so you may see a somewhat larger exclusion in 2015.
Federal Gift Tax
In addition to the federal estate tax, there is also a federal gift tax, and the two taxes are unified. The $5.34 million exclusion that we have in 2014 extends to lifetime gifts that you give along with the value of the estate that you are passing on to your heirs.
The maximum rate of the federal gift tax is also 40 percent.
We should point out the fact that there is an annual gift tax exclusion of $14,000 per gift recipient. This exclusion sits apart from the $5.34 million unified exclusion. The first $14,000 that you give to any one person within a calendar year can be given tax-free. If you wanted to give more to a given individual within a calendar year, you would be using a portion of your unified exclusion to give the gift in a tax-free manner.
Generation-Skipping Transfer Tax
The generation-skipping transfer tax can also be levied on certain asset transfers. This tax is potentially applicable on transfers to relatives who are more than one generation younger than you. It can also be applied on transfers to non-relatives who are at least 37.5 years younger than you are.
This tax is unified with the gift tax and the estate tax, so the $5.34 million exclusion applies to the combination of these three different types of transfers.
There is an unlimited marital deduction. As a result, you can transfer unlimited assets to your spouse free of federal transfer taxes while you are living, or after you pass away.
You do not have to use any of your exclusion to transfer assets to your spouse in a tax-free manner, as long as your spouse is an American citizen. The unlimited marital deduction is not available to spouses who are citizens of another country.
Wealth Preservation Consultation
In this post we have provided some basic information about federal transfer taxes. If you would like to learn more, feel free to call us for a consultation.