Tuesday, October 1, 2013
Emily M. Lanza
This report contains an explanation of the major provisions of the federal estate, gift, and generation-skipping transfer taxes as they apply to transfers in 2013. The following discussion provides basic principles regarding the computation of these three transfer taxes.
The federal estate and generation-skipping transfer taxes were resurrected by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) after a hiatus of one year (2010). The American Taxpayer Relief Act of 2012 (ATRA) permanently extended the estate tax rules enacted by the 2010 Act except for the top tax rate, which increased from 35% to 40% for both the estate and gift taxes.
The federal estate tax is a tax levied on the transfer of property at death and measured by the size of the decedent’s estate. The tax is computed through a series of adjustments and modifications of a tax base known as the “gross estate.” Certain allowable deductions reduce the gross estate to the “taxable estate,” to which is then added the total of all lifetime taxable gifts made by the decedent. The tax rates are applied and, after reduction for certain allowable credits, the amount of tax owed by the estate is reached.
The federal gift tax is a tax imposed on all gratuitous transfers of property made during life. The tax seeks to account for transfers of property that would otherwise reduce the estate and accordingly estate tax liability at death. The donor’s tax liability of the gift depends upon the value of the “taxable gift.” The taxable gift is determined by reducing the gross value of the gift by the available deductions and exclusions.
The unified transfer tax credit is available against both gift and estate tax liability. To the extent this credit is used to offset gift taxes, it is unavailable to offset estate taxes. The Internal Revenue Code refers to the credit as an “applicable exclusion amount,” that is, the amount of taxable gifts or estate that the credit would cover. The applicable exclusion amount in 2013 is $5,250,000.
The generation-skipping transfer tax attempts to close a perceived loophole in the estate and gift tax system where property could be transferred to successive generations without intervening estate or gift tax consequences. There are two basic forms of generation-skipping transfers: the indirect skip, where the generation one level below the decedent receives some beneficial interest in the property before the property passes to the generation two or more levels below; and the direct skip, where the property passes directly to the generation two or more levels below the decedent. The generation-skipping transfer tax is imposed at a flat rate of 40% with an available exclusion of $5,250,000. While it is of the same value, this exclusion is separate from the unified transfer tax credit available for the estate and gift taxes.
Date of Report: September 18, 2013
Number of Pages: 13
Order Number: 95-416
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