Ryan M. Wilson, Practice Area Chair
Federal and state wealth transfer taxes play a major role in preserving your assets for future generations of your family. Wealth transfer taxes are critical because the lowest tax rate is 37% and the highest rate is currently 46%. Wealth transfer taxes are imposed at rates higher than any other tax. In fact, wealth transfer taxes are higher than the highest current income tax rate. For this reason alone, wealth transfer tax planning has taken on added importance.
There are three different, yet inter-related, wealth transfer taxes of which you should have a working knowledge: (1) federal gift tax, (2) federal estate tax, and (3) federal generation-skipping tax. A single transfer may be subject to the gift tax and the generation-skipping transfer tax, or the estate tax and the generation-skipping transfer tax. Ordinarily, the same transfer is not subject to both the gift tax and the estate tax.
The "applicable exclusion amount' is the amount that an individual can transfer free of federal estate tax. For estate tax purposes, between 2002 and 2010 the applicable exclusion amount gradually increases and the top marginal estate tax rate decreases. In 2006, the applicable exclusion amount is $2.0 million. The applicable exclusion amount will increase to $3.5 million in 2009. In 2010, there will be no federal estate tax. Under current law, the sunset provision restores the $1 million applicable exclusion amount in 2011. As to the gift tax exemption, the current lifetime exemption is $1 million. As a result, the estate tax and gift tax regimes are no longer "unified". However, in 2011, the estate tax and gift tax regimes will again be "unified" unless new legislation is signed into law.
Many of you may already know that in 2006, you may gift up to $12,000 per year per person without being subject to federal gift tax. This $12,000 per person per year is in addition to the federal gift tax exemption. Amounts over this would use up some of your federal gift tax exemption. For instance, if you transferred $112,000 to one of your children this year, $12,000 would be treated as a nontaxable transfer, but the other $100,000 would be applied against your exemption amount. You would be required to file a federal gift tax return to reflect the $100,000 gift. After that, you would have $900,000 left to use in tax-free lifetime gifts.
If you exceed the federal gift tax exemption during your lifetime, you will pay federal gift tax. At your death, your estate will be liable to pay federal estate taxes if your lifetime transfers plus the value of your taxable estate, combined, exceed the federal applicable exclusion amount in effect at the time of your death.
In addition to estate and gift tax, you may be liable for an additional transfer tax – the generation-skipping transfer tax ("GST") if you make a transfer to a person who is more than one generation below you. The tax is there to discourage you from "skipping" a living member of one generation (such as your child) to instead make transfers to a more remote generation (such as a grandchild) in order to avoid having those assets included, and taxed, in the estate of the older generation. The GST is a flat-rate tax tied to the top marginal estate tax rate. The GST will not apply unless you make generation-skipping transfers of more than the applicable exclusion amount. In 2006, the applicable exclusion amount is $2.0 million. However, once you exceed $2.0 million in generation-skipping transfers, the GST will apply on top of any estate or gift tax you may owe. Identifying what constitutes a generation-skipping transfer is not always easy. The GST applies not only to outright gifts, but also to other transfers that might not be so obvious, such as gifts in trust. Note, however, that the GST does not apply to annual gifts that are less than $12,000. There are steps you can take to minimize and, in some cases, even eliminate transfer taxes. If you are concerned that your estate will be subject to transfer taxes, please contact one of Fraser Trebilcock Davis & Dunlap, P.C’s estate planning attorneys.
This summary is intended as a source of general information. If you have questions regarding this summary, please contact Ryan M. Wilson at (517) 377-0897 or rwilson@fraserlawfirm.com.
