- Privacy Policy For thismatter.com
- Information is provided 'as is' and solely for education, not for trading purposes or professional advice.
- Copyright © 2005 - 2011 by William C. Spaulding
The purpose of this article is to give an overview of how the gift, estate, and generation-skipping transfer (GST) taxes are calculated and how exemptions and deductions are applied. The gift, estate, and generation-skipping transfer taxes are excise taxes on the gratuitous transfer of money or property and are described in more detail in the following articles:
Although the transfer taxes are pretty hefty, there are numerous deductions and tax credits that can be used to greatly reduce the tax liability.
There is a gift tax annual exclusion, wherein no tax liability is incurred on the gift if its value is less than the exclusion amount, for each donee, regardless of who the donee is. Therefore, the annual exclusion also applies to the GST tax. In 1997, Congress set the size at $10,000, to be increased in $1000 increments according to inflation. In 2010, the amount is $13,000. If amount of the gift is less than the annual exclusion, then no gift tax return needs to be filed.
| Year(s) | Annual Exclusion |
|---|---|
| 1998 - 2001 | $10,000 |
| 2002 - 2005 | $11,000 |
| 2006 - 2008 | $12,000 |
| 2009 - 2010 | $13,000 |
If you or your spouse gives to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
In 2009, gift splitting allows married couples to give up to $26,000 to a person without making a taxable gift.
If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.
Note that if both you and your spouse give a gift that is less than the annual exclusion, then gift splitting is not necessary, since you are both entitled to the annual exclusion. Gift splitting would only be necessary when one spouse is more than the annual exclusion to a beneficiary.
Harold and his wife, Helen, agree to split the gifts that they made during 2009. Harold gives his nephew, George, $21,000, and Helen gives her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($13,000), by gift splitting they can make these gifts without making a taxable gift. Harold's gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen's gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.
Note, however, that if both spouses actually gave George and Gina $10,500 each, then a gift tax return would not have to be filed, since they are not splitting the gift but are simply using their own annual exclusion for each beneficiary.
The law provides a unified tax credit that allows a certain amount of property—the exemption amount (aka exemption equivalent)—to be passed free of estate or gift tax. Although most people think of the tax-free amount as being an exemption, the IRS actually calculates the exemption by granting a tax credit equivalent to the exemption. For instance, in 2003, the tax credit was $345,800 that allowed $1,000,000 of property to be transferred tax-free.
The credit is described as unified because it is a lifetime credit that applies to both gift and estate taxes. Each application of the credit during the taxpayer's lifetime reduces the credit.
For 2009, the unified tax credit for gifts is limited to $345,800, which allows an exemption of $1,000,000 for gifts. For estates, the unified credit is $1,455,800, which exempts $3,500,000 of estate property from taxes. Note that, although the 2 credits are differing amounts, they are still unified, in that any gift tax credit used will reduce the credit for the estate tax. Hence, if a taxpayer uses the $345,800 credit for gifts during his lifetime, then his estate credit will be reduced to $1,110,000, allowing only $2,500,000 worth of property to pass tax-free. Although there is no estate tax in 2010, the exemption amount is scheduled to return to $1 million in 2011. The gift tax remains $345,800 for 2010.
News Alert: A new tax law has been passed on December 17, 2010 that has increased the exemption amount for gifts, estates, and the generation-skipping transfer tax to $5 million, with a top tax rate of 35%, that will be in effect for 2011-2012. Executors of 2010 estates will also be able to select either the rules for 2010 or the new rules for 2011. Even though there was no estate tax in 2010, transferred property did not receive a stepped-up basis, thereby subjecting the recipients of the property to higher capital gains taxes. Hence, the executor can select the rules which will yield the most for its recipients.
| For Gift Tax Purposes: | For Estate and GST Tax Purposes: | |||
|---|---|---|---|---|
| Year | Unified Credit | Applicable Exclusion Amount | Unified Credit | Applicable Exclusion Amount |
| 2002 - 2003 | 345,800 | 1,000,000 | 345,800 | 1,000,000 |
| 2004 - 2005 | 345,800 | 1,000,000 | 555,800 | 1,500,000 |
| 2006 - 2008 | 345,800 | 1,000,000 | 780,800 | 2,000,000 |
| 2009 | 345,800 | 1,000,000 | 1,455,800 | 3,500,000 |
| 2010 | 345,800 | 1,000,000 | No estate or GST tax. | |
| 2011 - 2012 | 5,000,000 | 5,000,000 | ||
For any year in which a gift is given that exceeds the annual exclusion or for which gift splitting was elected, Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return must be filed.
The gift tax is calculated by adding the value of all gifts given over a lifetime that is above the exclusion and subtracting deductions and exemptions:
The federal estate tax is a progressive, cumulative tax with a rate that depends on the size of the tentative taxable estate, which includes the taxable estate plus all gifts given between 1976 and 3 years before the decedent's death.
| Tentative Taxable Estate Greater Than (Base) | But Not Over | Tentative Tax on Base | Plus Percentage of Remaining Amount |
|---|---|---|---|
| 0 | $10,000 | 0 | 18 % |
| $10,000 | 20,000 | $1,800 | 20 % |
| 20,000 | 40,000 | 3,800 | 22 % |
| 40,000 | 60,000 | 8,200 | 24 % |
| 60,000 | 80,000 | 13,000 | 26 % |
| 80,000 | 100,000 | 18,200 | 28 % |
| 100,000 | 150,000 | 23,800 | 30 % |
| 150,000 | 250,000 | 38,800 | 32 % |
| 250,000 | 500,000 | 70,800 | 34 % |
| 500,000 | 750,000 | 155,800 | 37 % |
| 750,000 | 1,000,000 | 248,300 | 39 % |
| 1,000,000 | 1,250,000 | 345,800 | 41 % |
| 1,250,000 | 1,500,000 | 448,300 | 43 % |
| 1,500,000 | 2,000,000 | 555,800 | 45 % |
| 2,000,000 | ∞ | 780,800 | 45 % |
In 2010, there will be no estate tax and the top rate for the gift tax will be the top marginal rate on income — 35%.
The gross estate includes property in the probate estate, nonprobate property, and any transfers where the decedent retained sufficient control or power over the property. Deductions include charitable gifts, debts, loans, and mortgages, funeral and other death related expenses, state death taxes, and the marital deduction. In broad outline, the estate tax is calculated thus:
Estate Tax Due = Tentative Tax - Credits
The personal representative of the estate is liable for the tax. If the value of the gross estate is larger than the exemption allowed by law, then the personal representative of the estate must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return with the Internal Revenue Service no later than 9 months after the death of the decedent, even if no estate tax would be due. However, the personal representative can file Form 4768 to automatically extend the time to file by 6 months.
The GST tax may apply to lifetime gifts or direct skips occurring at your death to skip persons. The GST tax is calculated on the value of the gift or bequest, after subtraction of any allocated GST exemption, at the maximum estate tax rate for the year involved, which, in 2011, will be 55%. Each individual has a GST exemption equal to the applicable exclusion amount for the year involved.
A direct skip is a transfer made during your life or occurring at your death that is:
A skip person is generally a person who is assigned to a generation that is two or more generations below the generation assignment of the donor. For instance, your grandchild will generally be a skip person to you or your spouse. The GST tax is computed on the amount of the gift or bequest transferred to a skip person, after subtraction of any GST exemption allocated to the gift or bequest at the maximum gift and estate tax rates.
Note that the GST tax is additional to the gift or excise tax. If a GST tax must be paid on a gift, then Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return must be filed and the donor of the gift must pay both taxes.
Transfer Tax = Gift Tax + GST Tax
If a skip person receives money or property from your estate, then Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return must be filed by your executor. In contrast to a gift, the taxes are paid out of the estate, hence reducing its value and reducing the amount received by the beneficiaries.
Transfer Tax = Estate Tax + GST Tax
Note that the unified tax credit can also be applied to the GST tax.
In December, 2010, President Obama signed a new tax law allowing the personal representative of a deceased spouse to transfer any unused tax exemption for gifts, estate, or GST taxes from the deceased spouse to the surviving spouse by claiming the transfer in the deceased spouse's estate return, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which would have to be filed even if there was no estate tax due to claim the transfer. However, the law is only in effect for the 2011-2012 tax years, unless Congress decides to extend it.