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Small Bites Podcast: Transfer taxes

October 2, 2023
Transfer taxes

Transfer taxes (including Gift tax, Estate tax, and Generation Skipping tax) are discussed in this episode of Small Bites of Business Insights. Exemptions and strategies that minimize transfer taxes are highlighted and the importance of properly planned wills and trusts in estate planning is reiterated.

Dr. Kathy Gosser, YUM! Assistant Professor of Franchise Management and Director of the Yum! Center for Global Franchise Excellence

Rebecca McDade, JD – Attorney


(NOTE: This is an automated transcription and not intended to be used as a substitution for listening to the podcast recording. Simply click on the player above and receive the full benefit of the conversation.)

So welcome to Small Bites of Business Insights, talking wealth planning. And in this. Particular small podcasts. I have Becca with me again. Hello, Becca. Hello. So this one, we’re going to talk about everyone’s favorite topic, tongue in cheek taxes, but we’re going to talk about transfer taxes and how that relates to the world of wealth planning.

So let’s pick up kind of where we left off Becca and tell us what is a transfer tax. A transfer tax is a tax that is assessed on assets that you want to transfer to somebody else. Whether you want to gift it to them during your lifetime or you want to give it to them upon your death. All right. So it’s another form of a tax.

So how many kinds of these taxes are there and how do they work? And you’ve told me about a few gift tax, estate tax. And something called a GST tax. So can you walk us through the gift tax? Okay. So the gift tax is a transfer tax that’s assessed on transfers that you make during your lifetime. So if I decide that I would like to give 5, 000 to my daughter, then there is a tax that is assessed on that 5, 000.

Um, the tax at the federal level is a 40 percent tax. So if I’m giving my daughter 5, 000, 40 percent of that would be the tax. So that would be 2, 000. Um, the way the tax works is I give the 5, 000 to my daughter. I’ve got a 2, 000 tax. So for this entire transfer, it would cost me 7, 000, 5, 000 going to my daughter and 2, 000 going to the IRS for tax.

Isn’t there an amount you can give freely every year? Yep. There are exemptions and exclusions from the gift tax. So each year I can give up to 17, 000 to as many people as I want. I can give 17, 000 to Kathy and 17, 000 to my friend, Susie. Each year without any gift tax consequences whatsoever. Okay. So, so in that example where you gave the 5, 000, that means I’ve already given 17.

If I have to pay a tax, correct? Absolutely. Okay. Yeah. So the example I was giving was just how the tax works, but you write fine using the 17, 000 in that case, it would either cover the full 5, 000 or I’ve already given 17, 000 to a person, there are other exclusions and exemptions. Why don’t I hit those a little bit later?

Cause they apply to both gift tax and estate tax. Yeah, let’s, let’s do that. But let’s talk about this gift tax for just a few more minutes. So what’s interesting is that explains why I’ve heard people say, while you’re alive, you should give some of your money away now. So if you have extra that you can give away now is a good time.

Absolutely. There are a number of reasons why people might want to give a gift one. I’m. You know, it might be for a special, um, occasion, a birthday or a Christmas or something like that. And I just want to give money to somebody. It could also be that I want to provide an income stream to someone. So I want to give them an interest in some rental real estate that I have so that they get a portion of the income that comes out.

Um, in which case I want to gift during my lifetime. Another reason why I might is to hedge the exemptions that we’re going to be talking about in a little while to help reduce the amount of tax that will be due upon my death. Because remember, a transfer tax is a tax that’s assessed against a transfer that I make either during my life or at death.

And when I. Make a gift during my lifetime. I am getting rid of from an estate tax point of view, the assets that I’m giving to you during my lifetime, and also all of the appreciation that’s earned on those assets. From the time of the gift to the date of my death. So you’re really getting out a lot more out of your estate than just the 5, 000 that I’m giving to Susie.

Oh, that makes so much sense. Does it make sense? Yes, that does. Okay. That, that does make sense. So what is the estate tax then? So the estate tax is a transfer tax. That’s assessed against transfers that I make at my desk. So, you know, when we were talking about the will and the revocable trust and we’re having assets that go from me to my beneficiaries, that’s when the estate tax is going to be assessed.

Like the gift tax, it’s a 40 percent tax. My beneficiaries don’t pay the tax. I pay the tax from other assets. Um, there is an exemption from the estate tax. So when we talked about the gift tax, I can give 17, 000 annually to as many people as I want. With the gift and the estate tax, there’s a lifetime exemption.

And right now that lifetime exemption is 12. 9 million per person. So I can give 12. 9 million. Spread across as many people as I want. So that’s different than the 17, 000, the 17, 000 resets for each person. I can give 17, 000 to each person. The 12. 9 is in the aggregate. So I have 12. 9 million that I can spread among as many people as I want.

And I can use that exemption against taxes, whether I make those transfers during life or at death. All right, that that makes sense. That makes total sense. And then what is the G. S. T. Tax? So that’s the generation skipping transfer tax. And basically, that’s a tax of 40%. That’s in addition to a gift or an estate tax.

It’s on top of it, and it’s a tax that’s assessed against transfers made from a person in one generation to a skip generation. So for instance, grandparent to grandchild, right? So in that example, if I give, I’m going to do round numbers this time. If I give 10, 000, not taking exemptions and exclusions into account, 40%.

would go for gift tax and an additional 40 percent would go for GST taxes. So 8, 000 would be my total tax liability. On a 10, 000 gift. Oh my gosh. We have to talk about how can you avoid some of these? Absolutely. You’ve provided some ideas here. Why don’t you tell us some ways to avoid these taxes? Okay, so one is the annual exclusion that we just talked about which is the 17, 000 that you can give every year There’s also unlimited gifting.

So the IRS has carved out two places where you can give an unlimited amount of money for the benefit of anybody you want, and that’s education and medical expenses. Oh, so I can give, if I want to pay for the medical expenses of my parents. I can do that without any transfer tax consequences whatsoever as long as I pay the medical provider directly.

Okay. So I pay the doctor, I pay the hospital, I can pay all of my parents medical expenses with no transfer tax consequences. I can do the same thing with education as long as I pay the college directly. Okay. So those are two places where I have unlimited gifting. I’ve got the lifetime exemption that I talked about, which is that $12.9 million exemption that I can use for gift taxes and estate taxes.

So if I use $5 million of my $12.9 million during my lifetime to cover gifts, that leaves me with $7.9 million that I can use at my desk to avoid estate taxes. Gotcha. Interestingly, the 12. 9 million Limit provides enough cover for 99 percent of the US so that estate tax is really only applying to the 1 percent of Americans.

I was wondering about that. I’m glad you stated that because I thought I bet that’s a small percent that really would run into those very, very high taxes. Absolutely. And when you look that each person has it, and that means that a married couple has 25. 6 million that they can shelter, then you’re talking an even smaller percentage of Americans that are affected by the estate tax.

Oh, sure. So it sounds scary, but in reality, it’s probably not for the majority of us. Absolutely. So, alright. And then there’s the Generation Skipping Tax Exemption. Yeah. Um, which… You really want to avoid since it’s an additional 40%. It too has an exemption that is 12. 9 million. Um, and you can use it during lifetime or at death to cover those gifts from grandparent to grandchild.

Well, that actually sounds very reasonable, especially the part about medical and educational efforts being exempt from these that, that is, that makes a lot of sense. So absolutely. Yeah. It’s a bonus. It is. It is a bonus. And it also shows that truthfully, the IRS has put the common sense in there and the, and the compassionate component.

To where people really need money, medical education, I mean, those are big needs. They’re not just wants. That makes a difference. So the last thing is let’s talk about maybe some ways to minimize transfer taxes that can’t be avoided, such as properly planned wills and trust to get us started. Okay. So one of the things that you want to do in terms of properly planning your will and your replicable trust.

And we’ve talked briefly about those before. Is to make sure that you’re taking advantage of your exemption amounts, lifetime exemption, 12. 9 million. So, I want to structure my will and trust so that I’m using my exemption and my husband is using his exemption and we’re not leaving either person’s exemption on the table for those people in the one percent.

Gotcha. Gotcha. Because it’s actually easy to do. And I want to do that both with the estate tax and with the generation skipping. Transfer tax exemptions. So I want to make sure that my wills and trusts are properly taking care of my exemptions, that lifetime exemption. I also want to take advantage of the marital deduction, which is really a tax deferral mechanism.

I can give an unlimited amount of property to my husband without any transfer tax consequences whatsoever and vice versa. Um, and that’s called the unlimited marital deduction. And when I’m doing estate planning, I want to make sure that if I die before my husband does, he gets the benefit of all of the assets that we built during our lifetime.

And I want to make sure that the assets are not reduced by transfer taxes until the death of the survivor of us. And if my assets exceed my exemption amount at 12. 9 million, Then I want the rest of the assets to be subject to a marital deduction, which would allow me to transfer assets to my spouse without any transfer tax consequences so that my spouse gets all of the assets that are subject to my lifetime exemption, the 12.

9 million. And all of the assets that exceed that amount without having to pay any transfer tax on it. And then there are so many wealth transfer strategies. Sometimes you’ll hear about them if you happen to listen to C SPAN. And not many people do. But if you listen to C SPAN, you’ll hear congressmen arguing.

over certain wealth transfer strategies that you can use that grats and digits and things, slaps, things like that, um, that allow you to take advantage of your exemption amounts and leverage them so that you can transfer more wealth to your beneficiaries at a lower transfer tax cost. And all of this explains why you need either a tax accountant or a wealth planning advisor to really help you through this if you’re in that top 1%.

If you’re in that top 1%, absolutely. But if you’re a business owner, yes, wealth transfer strategies, and we’re going to be talking about these in some of our later podcasts are going to be your friend, not because you’re necessarily in the 1%, but because you want to be able to transfer some of your business interests to your beneficiaries, your kids, but you’re also going to want to maintain control over those business assets.

And wealth transfer strategies will allow you to do both. And you are right, Becca. We’ve been talking about individuals, but once you get into business ownership, this becomes even more relevant and more important and probably something not talked about much. So I think we’re going to cover those in some future podcasts.

We hope our listeners join us for that. So thank you so much, Becca, for telling us even more about transfer taxes. Thank you for the opportunity. I appreciate it.