It is important to understand the federal transfer taxes that exist when you are planning your estate. One of these taxes is the generation-skipping transfer tax. Before we provide details about the generation-skipping transfer tax, we must provide some background information with regard to the other federal transfer taxes.
Federal Estate Tax
The federal estate tax is a threat to your wealth if you have been very successful from a financial perspective. In 2014, the federal estate tax credit or exclusion is $5.34 million. If you are transferring less than $5.34 million, the estate tax is not a factor for you. On the other hand, if your estate is valued in excess of $5.34 million, the estate tax looms large.
At the present time the top rate of the federal estate tax stands at 40 percent.
Federal Gift Tax
The federal gift tax exists so that people cannot give gifts while they are living in an effort to avoid the estate tax.
The gift tax and the estate tax are unified. The $5.34 million exclusion applies to taxable gifts that you give along with the value of your estate. As a result, if you utilize all of your $5.34 million exclusion giving tax-free gifts while you are living, the entirety of your estate would be subject to the estate tax.
There is also a $14,000 per person, per year gift tax exclusion that exists apart from the unified lifetime exclusion. The first $14,000 that you give to any one person during a calendar year can be given free of the gift tax.
There is no limit to the amount that you can give tax-free, as long as you do not give more than $14,000 to any one person within a calendar year. If you gave any one person more than $14,000, you could use a portion of your unified exclusion to give the gift in a tax-free manner.
Generation-Skipping Transfer Tax
The generation-skipping transfer tax is a third type of federal tax on asset transfers. This tax is levied on asset transfers to family members who are more than one generation younger than you, such as grandchildren or great-grandchildren. It is also applicable to transfers to unrelated parties who are at least 37.5 years younger than you.
This tax would be applicable on direct asset transfers or gifts held in trust.
Tax Efficiency Strategies
If you are exposed to federal transfer taxes, there are measured steps that you can take to mitigate your exposure and preserve your wealth. The optimal course of action will vary on a case-by-case basis, because each family is unique.
Our firm offers free estate planning consultations to people in and around Oklahoma City and Overland Park, Kansas. You can request an appointment through our contact page.
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