The accumulation of wealth is largely considered to be a good thing, but unfortunately some bad things can go along with it like federal transfer taxes. When you bequeath assets to your loved ones, or give them gifts while you are still alive, the transfers could be heavily taxed.
This is a serious matter, and you should take the appropriate steps to position your assets with tax efficiency in mind.
Let’s take a glance at a few frequently asked questions about federal asset transfer taxes.
What taxes on asset transfers are there?
There is a federal estate tax, a gift tax, and the generation-skipping transfer tax.
Does everyone have to pay the estate tax?
No, in fact most people will not be asked to pay the federal estate tax. This is because there is an estate tax exclusion, and it is relatively high.
The amount of the estate tax exclusion in 2014 is $5.34 million. Therefore, your assets will not be exposed to the estate tax if they do not exceed this amount.
However, there are state-level estate taxes that typically carry lower exclusions. Here in the state of California there is no state estate tax. But, if you are considering relocating to another state, you should look into the laws to find out if there is a state level estate tax and make the appropriate adjustments to your estate plan if you proceed with the move.
Is an estate tax and an inheritance tax the same thing?
This is a good question because people sometimes do mistakenly use the terms interchangeably.
No, an estate tax and an inheritance tax are different from one another. An estate tax is imposed on the entirety of the estate in question. An inheritance tax is levied on each individual who is receiving an inheritance.
There is no federal inheritance tax, but once again some states do have their own state level inheritance tax. California is not among them.
What about the gift tax, why don’t I get taxed every holiday season?
The federal gift tax is unified with the estate tax and it is indeed applicable to the gifts that you give your family on their birthdays and over the holidays. However, the reason why you’re not presented with a tax bill is because of the fact that there is a $14,000 per person, per year gift tax exclusion.
You can give gifts of up to $14,000 to any number of people every year free of the gift tax.
In addition, the $5.34 million exclusion that we highlighted previously is a unified exclusion. It applies to your estate coupled with the gifts that you give to others throughout your life that don’t fall within this $14,000 annual exclusion.