What are Estate, Gift, and GST Taxes?
It’s important to support our loved ones the best way we can. For many, this support comes in the form of financial assistance. We help our kids pay for college, make a down payment on their first home, and we gift our children and grandchildren money during the holidays. Ideally we would transfer all of our wealth to our loved ones instead of Uncle Sam, but without careful attention to detail, this could actually backfire quite badly.
The federal government heavily taxes the estate one leaves behind after death if their estate exceeds a certain threshold ($11.4 million per individual in 2019). In order to prevent people from gifting away large sums of their estate prior to death (and avoid paying the estate tax), the government also taxes gifts of money or property given during one’s lifetime that exceed exemption limits ($11.4 million per individual as mentioned above). The government also imposes a Generation Skipping Transfer (GST) Tax on financial gifts given to one’s grandchildren to prevent people from avoiding the gift tax.
How to avoid Estate, Gift, and GST Taxes?
The best way to avoid paying unnecessary Estate, Gift and GST Taxes is by knowing the exemption limits and laws associated with each of these taxes and only gifting up to the maximum amount.
Let’s say you are retired and have accumulated a sizable stash of hard earned wealth in your lifetime and you want to transfer it to your loved ones. It would be unwise to keep it all to yourself because you would pay a large 40% federal estate tax after you pass away. But at the same time, it would also be unwise to gift particularly large sums of it to your kids or grandkids that exceed exemption limits because you would have to pay a large gift tax and GST Tax.
So what do we do? Consult your attorney and financial advisor to determine the current exemption limits and formulate the best plant to maximize your exemptions.
Other Tips and Tricks
Additionally, there are other options to be aware of.
Through “Unlimited Marital Deduction” laws, unlimited transfers of wealth between spouses can be made during a lifetime or after death without any taxes imposed.
You can also give small “annual exclusion” financial gifts to all of your children, grandchildren, or as many individuals as you would like up to the federal limit ($15,000 per recipient in 2019).
Furthermore, direct payments to medical providers or educational institutions on behalf of a loved one can be made without being taxed.
By being informed, seeking legal counsel, and planning accordingly, your wealth can be optimally transferred to your heirs.