What are the estate, gift and generation skipping transfer taxes?
ESTATE, GIFT, GENERATION SKIPPING AND TRANSFER TAXES
When it comes to taxes, people often think of the downside of parting with hard-earned cash. In reality, the tax bite that may occur on assets an individual owns on his/her death may be the hardest hit of all due to the fact estate taxes are assessed on property on which an individual has already paid tax during such individual's lifetime. Additionally, if an individual owns retirement plans upon which income taxes are payable on distributions such as traditional IRAs, Simple IRAs, non-Roth 401(k)s, and qualified annuities, then estate taxes are imposed on the income tax built into such assets which means your estate will pay estate taxes on income tax. Additionally, with gift taxes it is true it is less costly tax-wise to make a gift during your lifetime then after your death because a gift during your lifetime is tax exclusive while a gift after death (subject to estate tax) is tax inclusive. An example of the tax exclusive/tax inclusive impact is as follows: Assuming the gift/estate tax rate is a flat 50% and assume all transfers are subject to this 50% tax: (1) Tax Exclusive example - if you wish to make a gift of $100,000 during your lifetime you would need a total of $150,000 because of the $50,000 tax on the $100,000 gift ($100,000 x 50%); (2) Tax Inclusive example - if you wish to make this same gift after your death you would need a total of $200,000 because of the $100,000 tax on the $200,000 transfer ($200,000 x 50%). However, you should not go out and make a bunch of gifts during your lifetime because this issue is only part of the problem. The other parts you need to worry about in regards to comparing a gift made during life or after death are: (a) the carryover basis issue (compared to the step up in basis issue with estate taxes imposed after death); (b) loss of use of the assets during your lifetime; (c) a minor child potentially owning the asset; (d) potential unintended imposition of generation skipping transfer taxes on a gift during your lifetime or on a transfer after your death; and (e) loss of assets due to creditor issues of recipients of gifts/transfers, etc. I could go on and on with problems that may occur.
Some people are under the impression that some assets in an estate are not subject to the imposition of estate, gift and generation skipping transfer taxes. This is because such individuals were informed by others that certain assets are not subject to tax, such as a life insurance policy. This is true in regards to "income tax". It is not true in regards to estate, gift and generation skipping transfer taxes. When an individual dies, the IRS looks at all the assets in such individual's estate in order to calculate estate and generation skipping transfer taxes on the same. Also, if taxable gifts are made during an individual's lifetime, those gifts are brought back into the estate for calculation of estate tax because those taxable gifts more than likely used up some of the exemption against gift and estate tax allocated to each person. Our firm specializes in this area of law as it complements very closely the other areas of law in which we specialize. Please feel free to contact our office to schedule a free consultation. I tell my clients the worse thing that may happen in such a meeting is you learn something new.
The current exemption against estate, gift and generation skipping transfer taxes is $11,200,000 for tax year 2018. This tax is a unified estate and gift tax which means if you make a gift of $11,200,000 during your lifetime then you will have no exemption available against estate tax on your death. However, remember the analysis from above in regards to comparing a lifetime gift compared to a gift after death. This analysis means no one may give a cookie cutter answer to an individual in regards to whether it would be better to make a gift during your lifetime or better after your death. A lot of factors must be considered before such a decision is made. If you are looking for ways to reduce and/or eliminate this tax impact and safeguard your assets, we can help you achieve these goals. Please contact our office for a free consultation.