In the United States, there are taxes that can be imposed on large asset transfers. We have a federal estate tax, and the tax carries a rather hefty 40 percent maximum rate.
The reason why we say that the tax is applicable on large asset transfers only is because there is an estate tax exclusion. This exclusion stands at $5.43 million in 2015. If the value of your estate is less than the amount of this exclusion, it would not be subject to the estate tax.
In addition to the federal estate tax, there is also a federal gift tax. The estate tax was enacted in 1916, and at first, people used to be able to give gifts to avoid the estate tax. This window of opportunity was closed when the gift tax was enacted in 1924. It was repealed in 1926, but it was reenacted in 1932, and it has been in place since then.
The gift tax and the estate tax are unified, so the $5.43 million exclusion applies to gifts that you give while you are living along with the estate that you intend to leave behind to your heirs.
Annual Gift Tax Exclusion
In addition to the unified lifetime gift and estate tax exclusion, there is also an annual gift tax exclusion. The exact amount of this exclusion is periodically adjusted to account for inflation, but at the present time, the annual gift tax exclusion is $14,000.
You can give up to $14,000 to any number of people in a calendar year free of taxation. To be clear, this exclusion is completely separate from the unified lifetime exclusion. If you gave someone a gift that exceeded $14,000 within a calendar year, you could use a portion of your unified lifetime exclusion to give the gift in a tax-free manner.
Since we are on the subject of gift tax exclusions, we should point out the fact that there is an educational exclusion. You can pay school tuition for others free of the gift tax.
In addition to the educational exclusion, there is also a medical exclusion. You can pay medical bills for others without incurring any gift tax liability, and this includes the purchase of health insurance for the benefit of other people.
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Attorney Caprice L. Collins is a top rated Harvard Law School graduate. She has 34 years of legal experience with a successful law practice devoted exclusively to Estate/Business Planning and Trust Administration. Attorney Collins is a well-respected keynote speaker on Wills, Living Trusts, Estate Planning, Business Planning and Trust Administration. She has appeared on California’s Real Estate Radio Station KTLK AM 1150 as a legal expert on Estate Planning and Living Trusts among many other notable media appearances.