Estate planning is a multifaceted endeavor, and wealth preservation is part of the equation. There are taxes on asset transfers in the United States that you must contend with if you have accumulated a significant store of wealth. One of them is the generation-skipping transfer tax.
Before the implementation of the generation-skipping transfer tax, people would create trusts for the benefit of their grandchildren in an effort to avoid the estate tax. The generation-skipping transfer tax was enacted to close this loophole.
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 on transfers to non-family members who are at least 37.5 years younger than you are.
Other Federal Transfer Taxes
The federal estate tax is a big source of asset erosion for high net worth individuals. At the time of this writing in 2014, the amount of the federal estate tax exclusion is $5.34 million.
The base was set at $5 million for the 2011 calendar year, and there have been ongoing annual adjustments to account for inflation. In 2015 another adjustment could be applied.
You can transfer as much is $5.34 million free of the federal estate tax, but anything that you transfer that exceeds this amount is potentially subject to taxation. The top rate of the federal estate tax is 40 percent.
In addition to the federal estate tax, we also have a federal gift tax. This levy is in place to prevent people from giving gifts while they are living to sidestep the estate tax. The gift tax is unified with the estate tax.
The $5.34 million exclusion applies to large gifts that you give while you are living along with the value of your estate as it is being passed on to your heirs.
You would be using a portion of your $5.34 million exclusion to transfer assets tax-free to people other than your spouse. There is an unlimited marital deduction, and it allows you to transfer any amount of money and/or property to your spouse tax-free.
Generation-Skipping Transfer Tax Parameters
The $5.34 million unified exclusion also extends to the generation-skipping transfer tax. There is just one of $5.34 million exclusion that encompasses all three taxes. You can transfer a total of $5.34 million tax-free, regardless of when you transfer the assets.
The generation-skipping transfer tax carries a 40 percent flat rate.
Tax Efficiency Strategies
If you inventory your assets and find that your estate is going to be exposed to the federal estate tax, action is required. There are a number of different things that you can do to reduce your estate tax exposure if your assets do exceed the amount of the exclusion.
Our firm can help if you have estate tax concerns. We offer free consultations to people in northern Kentucky and Charlotte, North Carolina. To request an appointment, send us a message through our contact page.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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