Transfer Tax System

Gift & Estate Planning Concepts: Transfer Tax System

At a Glance

After a decade of a decoupled gift and estate tax credit, shifting tax rates and exemption amounts, and a one-year repeal of the estate tax, there is some permanence to estate, gift and GST tax law.

The top tax rate for estate, gift and GST transfers is set at 40%. The Tax Cuts and Jobs Act of 2017 continued the unified gift and estate tax credit system and doubled the unified applicable exclusion to $10 million (adjusted annually for inflation). Plus, the once temporary measure permitting portability of a deceased spouse's unused applicable exclusion amount to the surviving spouse is now a fixture in the law.

Federal Gift Tax

The federal gift tax applies to gratuitous transfers made during life. It is levied on the donor, not on the donee (the recipient) of the property. The gift tax is cumulative: the current year's taxable gift(s) are added to prior year's taxable gifts in determining the tax rate on the current gift(s).

Federal Estate Tax

The federal estate tax applies to the transfer of one's net estate, after payment of debts and expenses, following death. The estate tax is imposed on the estate of the decedent, not on the individual recipients of estate assets. Taxable gifts made during life (after 1976) figure into the calculation of the estate tax.

Federal Generation-Skipping Transfer Tax

The federal generation-skipping transfer tax may apply when:

$image\bullet.jpg$ Transfers are made directly to members of younger generations (at least two generations below that of the donor)

$image\bullet.jpg$ Distributions are made from trusts to members of younger generations

$image\bullet.jpg$ An interest in property belonging to someone of an older generation terminates in favor of someone of a younger generation. The payer of the tax depends on the specific type of generation-skipping transfer involved

While the federal income tax is not part of the transfer tax system, don't forget that property transfers often have income tax consequences as well. For example, built-in capital gains and future appreciation and earnings potential can be shifted to the recipient of the transferred property.

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