Estate planning for high net worth individuals can be complicated because of taxes on asset transfers. We have an estate tax, a gift tax, and a generation-skipping transfer tax.
All of these taxes are considered to be unified by the Internal Revenue Service. As a result, you can’t really understand one of them without understanding all of them. Before we explain the generation-skipping transfer tax, we will look at the other two federal taxes on asset transfers.
Federal Estate Tax
The federal estate tax impacts those who have accumulated a significant store of wealth. There is a line that is drawn between people who must pay the tax and those who are exempt in the form of the federal estate tax credit or exclusion.
If your assets do not exceed the amount of this exclusion, you have no tax exposure. On the other hand, any assets that you want to transfer that exceed the exclusion amount are potentially subject to taxation.
The amount of this credit or exclusion is $5.34 million in 2014. There is a base of $5 million that was put in place for the 2011 calendar year, and there have been ongoing annual adjustments to account for inflation. Another adjustment for inflation could be applied next year.
Federal Gift Tax
The estate tax was first enacted in 1916. For a few years after that, high net worth individuals could give gifts while they were living to avoid the estate tax. Ultimately a gift tax was enacted to close this loophole.
Because the gift tax and the estate tax are unified, the $5.34 million exclusion applies to the combination of taxable gifts that you give along with the value of your estate. In other words, if you give $5.34 million in tax-free gifts while you are living, the entirety of your estate would be subject to the federal estate tax.
Generation-Skipping Transfer Tax
In addition to the estate tax and the gift tax, we also have the generation-skipping transfer tax. This tax is applicable on asset transfers to members of your family who are more than one generation younger than you are. It can also be applied on transfers of assets to non-relatives who are at least 37.5 years younger than you.
The generation-skipping transfer tax can be applied to direct asset transfers, and it can also be applicable on assets held in trust.
Tax Efficiency Strategies
If you are exposed to federal transfer taxes, there are various different strategies that can be implemented to mitigate your exposure. The optimal course of action will vary on a case-by-case basis, so personalized attention is key.
We offer free consultations to people in the greater San Jose Bay Area. To request a free wealth preservation consultation, send us a message through this website.
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