Frequently Asked Questions

What is the estate tax?

The estate tax is a tax on a testamentary (at death) transfer of wealth.

What is the gift tax?

The gift tax is a tax on an inter vivos (during lifetime) transfer of wealth.

What is the generation-skipping transfer tax?

The generation-skipping transfer (GST) tax is a tax on a transfer of wealth that skips one or more generations, e.g., from grandparent to grandchild. However, what actually constitutes a generational skip for transfer tax purposes is defined by a complex set of rules in the Internal Revenue Code and the Treasury Regulations. Note that the GST tax is incurred in addition to the gift tax or estate tax on a generation-skipping transfer of wealth.

What is the basic exclusion amount?

The basic exclusion amount is the initial amount of wealth that each taxpayer may transfer free of tax. In 2022, each taxpayer has a basic exclusion amount of $12,060,000, which is indexed for inflation annually.  However, on January 1, 2026, the basic exclusion amount is scheduled to decrease to $5,000,000 adjusted for inflation.

What is the deceased spousal unused exclusion amount (DSUE Amount)?

The deceased spousal unused exclusion amount (DSUE Amount) is the unused exclusion amount of your last deceased spouse. If you are a surviving spouse, you may add the DSUE amount of your last deceased spouse to your basic exclusion amount by timely filing a federal estate tax return for your deceased spouse, which is referred to as “portability” of the DSUE Amount.

What is the applicable exclusion amount?

The applicable exclusion amount is the total amount of wealth that each taxpayer may transfer free of tax; and it is the sum of the taxpayer’s basic exclusion amount and any DSUE amount claimed from his or her last deceased spouse.

What is the tax rate on wealth transfers and how much may I transfer without being taxed?

In 2022, the maximum rate for gift tax, estate tax, and generation-skipping transfer tax purposes is 40% on cumulative lifetime and testamentary taxable gifts that exceed a taxpayer’s applicable exclusion amount.

What kinds of lifetime gifts are not taxable?

Each year a taxpayer is permitted to make an unlimited number of tax-free “annual exclusion gifts.” An annual exclusion gift must be a gift of a present interest. In 2022, the annual exclusion amount is $16,000 per donee; and this amount is non-cumulative. For example, if a married couple has 2 children, mom and dad may combine their annual exclusion gifts to give each child $32,000 this year, irrespective of any amount that they gave their children last year. If you make a gift of a present interest of more than $16,000 to an individual in a calendar year, the excess is a taxable gift that must be reported to the Internal Revenue Service on a timely filed federal gift tax return.

Also, payments of tuition or medical expenses that are made directly to the educational or healthcare provider are not taxable gifts, nor are they annual exclusion gifts. For example, if you pay the school directly for your godchild's tuition, or you pay the hospital directly for your friend’s surgery, you have not made a taxable gift, nor have you made an annual exclusion gift. However, if you give money to your godchild's parent or to your neighbor for them to use to pay those bills, then you have made a taxable gift.

Finally, a certain percentage of certain gifts to qualified charities are non-taxable.

The above information is provided for educational purposes only.  If you have any questions regarding estate and trust planning, estate and trust administration, probate, asset protection, or business entity formation, and how the laws in these areas may impact you and your family, please contact us at Paley Law at 323.654.9513 or info@paleylaw.com.

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