The goal for many is financial success. Of course, the fruition of this goal will lead to significant rewards. However, quite ironically there are potential penalties that go along with these rewards.
When we are talking about penalties we are referring to federal transfer taxes. Though the powers that be would not technically define these taxes as penalties, many can’t help but see it that way.
Successful people who want to give significant sums of money to their loved ones are faced with the prospect of being heavily taxed for their efforts. The taxes can be imposed when you are alive, and they can be imposed after you pass away.
The Federal Gift Tax
First off let’s look at the federal gift tax. This tax is applicable to gifts that you give to others if they exceed a certain amount. It carries a 40% maximum rate.
There is a $14,000 per person, per year gift tax exclusion.
This means that you can make gifts totaling as much is $14,000 each year to an unlimited number of gift recipients. If you are married, you and your spouse can combine the respective exclusions that each of you are entitled to and gift as much as $28,000 to any number of individuals within a given year, free of taxation.
Speaking of spouses, there is an unlimited marital gift tax deduction. You could give any amount of money to your spouse, free of the gift tax.
There is also a gift tax exemption for educational gifts. You can pay for school tuition of students tax-free, but this exemption does not extend to other expenses like books and fees.
In addition, you can pay medical bills for others, including health care insurance premiums, without incurring any gift tax liability.
Once you have given more than $14,000 to someone in a given year you could still make additional tax-free gifts by using a portion of your unified lifetime gift/estate tax exclusion. This year the unified exclusion is $5.25 million. If you used a portion of your unified exclusion during your lifetime, that amount would be subtracted from the $5.25 million to determine your remaining exclusion.
Estate Tax
The estate tax carries the same 40% maximum rate, and the exclusion of $5.25 million compasses the value of your estate and the value of taxable gifts that you have given throughout your lifetime.
That unlimited marital deduction that we mentioned above also applies to assets that are transferred to your spouse after you pass away.
This is assuming that your spouse is an American citizen. The unlimited marital deduction is only extended to citizens of the United States.
Generation Skipping Transfer Tax
If you arrange for the transfer of assets to someone outside of your family who is at least 37.5 years younger than you, or someone who is at least one generation younger than you who is a family member, the generation-skipping transfer tax would be applicable.
This tax also has a $5.25 million exclusion and a 40% maximum rate in 2013.
Larry Parman
Author, President and Founding Attorney
Parman & Easterday
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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