Estate tax: The federal estate tax applies to the transfer of wealth when a person dies. It is assessed on the total value of the decedent’s estate, including real estate, investments and personal property. As of 2024, the federal estate tax exemption is $13.61 million per person. Estates valued above this threshold are subject to taxation at rates up to 40%.
Gift tax: The gift tax applies to the transfer of money or property during an individual’s lifetime. In 2024, the annual exclusion for gifts is $18,000 per recipient, allowing individuals to give up to this amount to as many people as they wish without incurring gift taxes. Lifetime gifts exceeding this amount count against the lifetime exemption.
Generation-skipping transfer (GST) tax: This tax applies when wealth is transferred to a “skip person,” typically a grandchild or younger relative. The GST tax is designed to prevent individuals from avoiding estate taxes by skipping a generation. Like the estate tax, it has a substantial exemption amount of $13.61 million ($27.22 million for a married couple) in 2024.
State taxes: In addition to federal taxes, some states impose their own estate or inheritance taxes, with varying exemption amounts and rates. It’s important to consider state-specific laws when planning wealth transfers.
Step-up in basis: When assets are transferred at death, they typically receive a step-up in basis, meaning the asset’s value is reset to its fair market value at the time of the decedent’s death. This reduces capital gains tax for the beneficiaries if they later sell the asset.