As you begin your estate planning, strategies for reducing estate tax may be first on your to-do list. Or perhaps you think the current $5.45 million exclusion, combined with portability of the exclusion for married couples, means you have nothing to worry about. But overlooking other types of taxes that may apply to your estate can be costly. Here are two.
- Generation-skipping transfer tax. The generation-skipping transfer tax is imposed when you transfer assets to your grandchildren, or others who are two generations or more below you. The tax has a maximum rate of 40%, and applies to transfers made directly or in trust. Similar to estate and gift taxes, you can apply a lifetime exclusion of $5.45 million to your generation-skipping transfers. Both the tax and the exclusion are separate from estate and gift taxes.
Tip: You may need to report generation-skipping gifts on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
- Gift tax. For 2016, you can transfer up to $14,000, estate- and gift-tax free, to anyone you choose. You and your spouse can combine gifts and make a tax-free transfer of up to $28,000. For amounts greater than the annual exclusion, gift taxes are “unified” with estate taxes under current rules, meaning the two share a current lifetime exclusion of $5.45 million. The result? Whatever portion of the $5.45 million exclusion you use to offset gift taxes is unavailable to offset estate tax.
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