Chapter 7.1 Overview
| Jurisdiction | Washington |
This chapter presents an introduction to the federal and Washington wealth transfer taxes. At some points, the chapter discusses some of the basic techniques commonly used to reduce potential exposure to federal and state tax liability. However, the chapter does not include an extended discussion of sophisticated estate planning techniques. Other references provide more thorough discussions. See, e.g., Richard B. Stephens et al., Federal Estate & Gift Taxation (9th ed. 2015); John R. Price and Samuel A. Donaldson, Price on Contemporary Estate Planning (2018 ed.).
(1) An introduction to federal wealth transfer taxes
The federal wealth transfer tax regime consists of three separate taxes: (1) the estate tax; (2) the gift tax; and (3) the generation-skipping transfer tax. All three taxes are excises imposed on the gratuitous transfer of wealth by individuals. Accordingly, they are generally imposed on the transferor or the transferor's estate. In contrast, an inheritance tax is imposed on the receipt of property from a decedent at rates that vary according to the recipient's relationship to the decedent. Wealth transfer taxes are also distinct from an income tax imposed on
[Page 7-3]
an annual or other regular basis. Wealth transfer taxes are imposed only upon the occasion of a gratuitous transfer.
Because the gift tax was originally a derivative of the estate tax, understanding the mechanics of the gift tax requires an understanding of the estate tax. Accordingly, this chapter discusses the estate tax first.
(a) The federal estate tax
The federal estate tax captures wealth transfers that occur, or are considered to occur, at death. It is determined by aggregating a decedent's transfers in the decedent's "gross estate" and then subtracting deductions to arrive at the "taxable estate." A tax table is then applied to the "taxable estate" to compute the tentative tax liability. Credits are then subtracted from the tentative tax to reach the final tax liability, the amount of which is due no later than nine months following the decedent's death. Because the estate tax is an excise imposed upon the transfer of wealth at death, the decedent's estate is primarily liable for payment of the tax.
(b) The federal gift tax
The gift tax was adopted to ensure that an individual could not avoid the estate tax by making lifetime transfers. Otherwise, an individual with a taxable estate would simply give all of his or her property to the intended beneficiaries and die owning little or nothing. In effect, an estate tax would only be imposed on individuals who could not give everything away prior to death. Because the gift tax exists in part to protect the estate tax, the two taxes bear close resemblance. In 1976, the taxes became "unified" in the sense that the same rate table applies to both. Because the gift tax applies to lifetime wealth transfers, the donor is primarily liable for payment of the tax.
(c) The federal generation-skipping transfer tax
The federal generation-skipping transfer tax is also intended to assure that the estate tax or a rough equivalent is imposed at least every other generation as wealth descends within a family. Affluent families could easily avoid multiple layers of transfer taxes by transferring their wealth to trusts designed to last for generations.
[Page 7-4]
| Comment: | Although the rule against perpetuities prevents the creation of
noncharitable perpetual trusts, a number of states have repealed
the rule or substantially extended its period. Trusts subject to
the laws of these states can last hundreds of years
For example, consider two families, each with $100 million in wealth all currently in the hands of the first generation. If the first family takes no action and the second family locks away its wealth into a perpetual trust, the after-tax wealth of the two families would be dramatically different, assuming a flat transfer tax rate of 50 percent and ignoring any applicable exemptions and deductions:
Congress thought these results unduly benefited the second family, so it imposed a separate tax on so-called "generation-skipping transfers." The goal is to discourage affluent families from locking away wealth and thus avoiding federal estate tax at each generation. The tax is imposed upon the receipt of wealth by a person two or more generations below the transferor, whether such transfer occurs directly or through a trust created by the transferor. |
(2) Computing liability for federal estate and gift taxes: a unified system
Estate and gift tax liabilities are both calculated using the tax tables set forth in I.R.C. §2001(c). The federal estate tax is calculated by applying the rate table to the sum of the decedent's taxable estate and the taxable gifts made during the decedent's lifetime. One "unified" credit amount is applied against the tax liability determined under this tax table. The unified credit amount is equal to the tax on a specified sum, often referred to as the "exemption amount" or "applicable exclusion amount." In 2010, Congress changed the term "unified credit" to "applicable credit" to take into account the...
To continue reading
Request your trial