Estate, Gift and Generation Skipping Transfer Tax

There are three types of federal taxes that can be imposed on the transfer of assets.  These taxes are the:

  • Estate Tax
  • Gift Tax
  • Generation-Skipping Transfer Tax

These taxes are generally referred to as transfer taxes because they are levied when property is transferred for less then full and adequte consideration. Unlike an income tax, each of these transfer taxes is not based on what is earned, but rather the tax is determined based on the fair market value of the property that was transferred.

Estate Tax.  Upon death, a person’s (decedent) gross estate includes the then current fair market value of all property interests held by the decedent at the time of his or her death, whether passing by operation of law (such as joint tenancy assets), by operation of contract (such as insurance proceeds), or by operation of probate laws.  There are deductions for debts, administrative expenses, qualified transfers to spouses, and transfers to qualified charities.  The net amount is the taxable estate.  In 2011, the estate tax is determined based on the value of the taxable estate.  Because of estate tax credits, the first $5,000,000 of net worth could be passed at death without incurring an estate tax.  Any amount in excess of $5,000,000 would be taxed with the highest federal estate tax bracket being 35%.  

It should be noted that in 2013, if no law is passed by congressional action, the estate tax is set to revert to prior law which is not as taxpayer friendly.  This will mean that instead of being able to leave $5,000,000 at death, a person will only be allowed to pass $1,000,000.  In addition, instead of a highest estate tax rate of 35%, the estate tax rate will be 55%.  will come back, but the estate tax credit will be only $1,000,000 (instead of $3,500,000 as it was in 2009) and the highest estate tax rate would be 55%.

Gift Tax.  If a person gives away property, there can also be a tax.  A person (donor) can give assets with unlimited value to a spouse who is a U.S. citizen (using a marital deduction) or to qualified charities (using a charitable deduction).  In 2011, gifts totaling up to $13,000 can be made to any number of individuals in each calendar year.  Taxable gifts are gifts that do not qualify for the marital deduction, charitable deduction, or $13,000 annual gift tax exclusion.  Because of the “applicable exclusion”  that is available to each person, no gift tax has to be paid until after the donor has made lifetime gifts in excess of that exclusion (which is $5,000,000 in 2011).  After the exclusion amount has been exceeded, the federal highest gift tax bracket is 35%.  If the law does not change, then in 2013 the "applicable exclusion" is reduced to $1,000,000 and the gift tax rate is increased to 55%. 

Generation-Skipping Transfer Tax.  In 2011, the generation-skipping transfer tax is generally applicable to transfers that skip a generation, like a gift from a grandparent to a grandchild.  The generation-skipping transfer tax is a one-rate tax equal to the highest estate tax bracket, but each donor or decedent had a $5,000,000 generation-skipping transfer tax exemption, and for certain transfers a $13,000 generation-skipping annual exclusion that is somewhat akin to the gift tax annual exclusion.  The generation-skipping transfer tax applies in addition to any applicable gift or estate tax.  Estate taxes paid are deducted before computing the generation-skipping transfer tax, but combination of the estate tax and the generation-skipping transfer tax can result in a combined rate of over 60%.  In 2013, if no further congressional action is takent, the generation-skipping transfer tax exemption is scheduled to be reduced to $1,000,000 and the tax rate is scheduled to increase to 55%.

The chart below provides a summary of the federal estate, gift and generation-skipping transfer tax law as it existed in 2009 and as it stands for 2010 and 2011 assuming no further congressional action.

 

 

2009

2010

2011

Estate Tax Exemption Amount

$3.5 million

$5.0 million or No Estate Tax

$5.0 million

Gift Tax Exemption Amount

$1.0 million

$1.0 million

$5.0 million

GST Exemption Amount

$3.5 million

$5.0 million or GST Tax Repealed

$1,060,000 
plus inflation adjustment

Highest Estate Tax Rate

45%

35% or No Estate Tax

55%

Highest Gift Tax Rate

45%

35%

35%

GST Tax Rate

45%

GST Tax Repealed

35%

 

The potential changes in the transfer in the tax law in 2013 creates uncertainty and warrants a review of your existing estate plan to ensure it still fulfills your goals and objectives.  You may also wish to consider transactions that take advantage of the potential 2011 and 2012 tax planning opportunities.  

We would be happy to review your existing estate planning documents in light of the changes to the federal estate, goft and generation-skipping transfer tax laws to ensure it still meets with intent and accomplishes your goals and objectives.  For a free initial consultation about how these law changes may effect you, please contact us.

 

The Law Office of Richard C. Petrofsky assists clients with Estate and Gift Planning, Wills, Trusts, Charitable Planning, Special Needs Planning, Elder Law and Medicaid Planning, Estate and Family Planning for Same-Sex Couples and LGBT Individuals, Asset Protection Planning and Corporate and Business Planning in St. Louis, Missouri and surrounding areas.