Three transfer taxes to consider when putting together an estate plan

On Behalf of | Jan 27, 2016 | Articles

Estate plans can help reduce tax obligations, including transfer taxes.

Estate plans can be designed to meet a variety of goals, including reducing an estate’s tax obligations. In order to help reduce these obligations, it is wise to have a basic understanding of the taxes that can apply. Two broad categories include transfer taxes and income taxes. This article will address transfer taxes.

Estate planning and transfer taxes

Transfer taxes are the charges levied on the conveyance of a property or assets from one person to another. These taxes can apply at both the federal and state levels on transfers made during one’s lifetime and at death. Some of the more common transfer taxes include:

  • Estate tax. This tax is defined by the Internal Revenue Service (IRS) as a tax on the transfer of property at death.
  • Generation-skipping transfer tax. Also known as the GST tax, this tax is imposed on transfers made to grandchildren and other, more remote, relatives. It is important to note that this tax is imposed in addition to gift or estate taxes.
  • Gift tax. This tax can be applied to money or property transfers completed during the giftor’s lifetime.

An estate plan can be put together to help reduce these tax obligations.

Estate planning tips to reduce these tax obligations

The IRS states the federal exemption amount for 2016 for the estate, GST and gift taxes are set at $5,450,000. Transfers made either during one’s lifetime or at death that fall below this amount are generally not subject to federal transfer taxes. This tax is applied per person, meaning that married couples are each, individually eligible. In some cases, if a deceased spouse does not use all of his or her exclusion amount, the remaining spouse may be able to roll the remaining available amount into their own exclusion. The rules that govern this process are referred to as portability of estate tax exemptions.

There are certain gifts that do not go towards this federal exemption amount. Some examples include payments made to cover medical or education expenses and transfers to spouses or to trusts designed for the benefit of a spouse.

Importance of legal counsel

These are just a few of the many legal tips that can be used to reduce tax obligations. Additional tools are available to help tailor an estate plan to each individual’s needs. An experienced estate planning attorney can discuss these options with you and help put together a plan to meet your needs.