Federal Gift and Estate Tax Summary
The unified tax on transfers has three parts:
gift tax (for transfers made during life),
estate tax (for transfers made at death)
and generation-skipping tax (for transfers that skip a generation).
The gift and estate taxes are imposed on an individual for gifts during life and on his or her estate for transfers at death based upon the value of the property.
The result is that there is normally a separate tax as the property passes from one generation to the next. But, if property is transferred to a person two or more generations younger than the person making the transfer, one generation or more of taxation is lost. For example, a parent transfers property to a child and, to the extent that the value exceeds any exemption or exclusion, the transfer is subject to tax. The child then transfers property to his or her child and again, to the extent that the transfer exceeds any exemption or exclusion, the transfer is subject to tax. But if the grandparent skips the gift to his or her child and transfers the property to a grandchild or more remote descendant, the opportunity for taxation would be lost. To plug this hole, the Internal Revenue Code (the IRC) imposes a tax on such transfers. The current tax maximum rate is 40%, and the exemption as to this special tax is $5,450,000 for all such transfers (the lifetime generation skipping tax exemption), as well as an annual gift tax per-donee exclusion at $14,000.00 for 2016.
The tax at death and the tax on transfers that skip a generation were repealed and then reinstated. The gift tax was not repealed. All their taxes are now in effect. The top gift rates for transfers during life, the estate tax at death and which skip a generation are at 40% for 2016.
A transfer to a spouse is exempt from taxation without limit.
A gift made during life is exempt from taxation up to a limit for 2016 of $14,000.00 per year for each recipient(the annual per-donee exclusion). This amount is doubled for gifts by husband and wife. The life time exemption for gifts and estate tax is $5,450,000, adjusted for inflation after 2011. A deceased spouse’s unused estate and gift tax exemption is portable and can be used by the surviving spouse. This provision allows families from incurring gift and estate tax that could have been avoided through estate planning. The generation skipping tax is not portable.
The exemption for generation skipping transfers is a cumulative $5,450,000 for 2016, covering both transfers during life and at death.
If transfers during life, at death or skip a generation exceed the applicable exemptions or exclusions, the transfer may be subject to tax.
Even with this integrated tax structure, there are substantial opportunities for tax savings. For example, annual gifts equal to or less than the then current annual per-donee gift tax exclusion continued over a period of years will allow a tax free transfer of substantial property. In addition, gifts of property that will substantially appreciate can be transferred at its value at the time of the gift, which may be at or below the annual per-donee exclusion, with the appreciation in value passing to the donee tax free. This type of lifetime gift can be utilized with the transfer of insurance, closely held stock and other property having a substantial likelihood of appreciation over time. Another variation is the Grantor Retained Income Trust(GRIT). The planning involving such a retained interest transfer is complex, but the tax savings can be substantial. Frequently, there is no tax at the time of the gift. The trust income is a periodic gift as it becomes distributable to the beneficiary. The controlling estate tax factors have to do with the grantors reserved power to alter, amend or revoke as well as to designate who shall possess and enjoy the property.
Planning for these events, as well as the valuation of the property transferred, the application and allocation available exclusions or exemptions, the calculation of the tax, and the preparation of appropriate returns, are complex matters upon which it is best to seek professional assistance.
Call Attorney C. Stephen Gurdin Jr. at his Gurdin Law Wilkes-Barre Scranton Pennsylvania area office today, 570.826.0481.