There are taxes on asset transfers in the United States. We have a federal gift tax, a federal estate tax, and a generation-skipping transfer tax.
We will look at all of these taxes in this post to provide clarity and context, but first, let’s answer the question that serves as the title. The generation-skipping transfer tax is a tax that is potentially imposed on asset transfers to family members who are more than one generation younger than you, or to someone who is not related to you who is at least 37.5 years younger than you are.
The transfers could be direct gifts, or transfers that are made through the terms of a trust.
Unified Lifetime Exclusion
The estate tax is unified with the gift tax. There is a $5.34 million unified exclusion. This is the amount that can be transferred before taxes would become applicable. The same exclusion applies to the generation-skipping transfer tax. If you were to create a trust for the benefit of your grandchild that contained less than $5.34 million, the transfer would be exempt from this tax.
It is important to understand the fact that this exclusion applies to the combination of any transfers that you may make throughout your lifetime or after you pass away. For example, suppose you give a $5.34 million direct gift to your son today. You have used all of your unified lifetime exclusion. Any transfers that you make in the future would be subject to federal transfer taxes.
The maximum rate of the gift tax and the estate tax is 40 percent, and this is the flat rate of the generation-skipping transfer tax.
Annual Gift Tax Exclusion
In addition to the unified lifetime exclusion, there is also an annual $14,000 per person exclusion. Under the tax code, you can give as much as $14,000 to any number of people within a given year, equaling any sum of money, free of transfer taxes.
If you give more than $14,000 to any one person within a year, you could give the gift tax-free, but you would be using a portion of your unified lifetime exclusion to give this gift.
Tax Efficiency Strategies
The bottom line is this: if you are not transferring more than $5.34 million you don’t have to worry about transfer taxes on the federal level. However, some of the states in the union impose state-level estate taxes, and a few of them have inheritance taxes. The state level exclusions are typically lower than the federal exclusion.
Our firm practices in Iowa. We do not have a state-level estate tax, but we do have an inheritance tax in Iowa.
If you are concerned about transfer tax exposure, our firm can help. We offer free wealth preservation consultations, and you can request an appointment electronically through this website.