Gift, Estate, and Generation Skipping Transfer Tax

What are Gift, Estate, and Generation Skipping Transfer taxes? Do they apply to me, and if so, how? This post explores what these taxes are and how they are applied.

The federal government imposes taxes on gratuitous transfers of property made during your lifetime. These are known as gift taxes. The federal government also imposes taxes at death known as bequests or devises. Gift taxes are imposed on transfers during your lifetime that exceed the exemption limits, and estate taxes are imposed on transfers at death that exceed the exemption limits. The generation-skipping transfer (GST) tax is imposed on transfers to grandchildren and more remote descendants that exceed the exemption limits so transferors cannot avoid transfer taxes on the next generation by “skipping” a generation. The GST tax is levied in addition to gift or estate taxes.

In 2011, the gift, estate, and GST tax exemptions were $5 million. The exemptions are indexed for inflation, resulting in exemptions of $5.49 million for 2017. In December 2017, Congress increased the gift, estate, and GST exemptions to $10 million through 2025. When indexing for inflation, these exemptions are $11.7 million for 2021.

That means, an individual can transfer property with value up to the exemption amount either during your lifetime or at your death without paying any transfer tax. In other words, any portion of exemption used during your lifetime reduces the amount of exemption available at death for estate tax purposes.

For example, say you made a lifetime taxable gift of $5 million in 2020, your remaining exemption amount that could be used by your estate at your death would be $6.7 million. Certain gifts are not applied toward the exemption, such as “annual exclusion” gifts and direct payments to medical or education providers, which can be made completely tax free.

Transfers between spouses and to certain trusts for spouses, made during your lifetime or at death, may be made without the imposition of any tax. These transfers also do not use any exemption. Moreover, beginning in 2011, the adjusted estate tax exemption is “portable” between spouses. That means your surviving spouse may take advantage of a deceased spouse’s unused exemptions.

With the new high exemptions most people will no longer be subject to the federal estate tax, but this fact should not be interpreted to mean that planning is not necessary. Federal gift, estate, and GST taxes are but one component of the myriad of issues addressed in the estate planning process. In addition, certain states impose gift, estate, and inheritance taxes. Fortunately for Indiana residents, Indiana does not levy a gift, estate, or inheritance tax. According, this type of planning should be pursued with professional guidance.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.