You have to be aware of the existence of transfer taxes when you are engaged in your estate planning efforts. There is a federal estate tax that high net worth individuals must contend with, and this tax can take a significant bite out of your legacy, because it carries a 40 percent maximum rate.
The estate tax is not applicable on asset transfers between spouses, as long as the people in question are American citizens. Transfers to others are potentially taxable.
It would be logical to consider lifetime gift giving as a way to avoid the estate tax. When the estate tax was initially enacted in 1916, this was possible, because there was no gift tax. In 1924, a gift tax was enacted to close the loophole.
This tax was repealed in 1926, but it was reenacted in 1932, and we have had a gift tax since that time. During the 1970s, the gift tax was unified with the estate tax. Since the two transfer taxes are unified, the top rate of the gift tax is also 40 percent.
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