What Are Estate Tax Exemptions?

Two separate estate tax exemptions exist that could apply when leaving assets to family, a lifetime tax exemption and a generation-skipping exemption.

Lifetime Tax Exemptions

The exemption most typically applied is called the Lifetime Tax Exemption, where each individual has a certain amount of federal tax exemption that they can leave to their heirs, usually a spouse or children. Any amount over that exemption level, currently set at $5.25M, will be taxed based on current estate tax tables.

For 2013, the estate tax rate is set at 40% in excess of $5.25M in exemptions. (This figure can change upward yearly, with adjustments based on Cost of Living (COL), as the law currently stands.)

If the funds are left to the surviving spouse, either directly or in an A trust, then it is not going to directly taxed, but added to the surviving spouse’s estate. He/she will use their lifetime exemption, and then be taxed on anything over the $5.25M (plus annual COL increases.

Generation-Skipping Transfer Tax Exemptions

The generation-skipping transfer (GST) tax is a tax on property that is passed from a grandparent to grandchildren, great-grandchildren,(or unrelated individuals more than 37.5 years younger) in a will or trust. A GST tax is imposed even when property is left in trust for a grandchild. For example, suppose a grandparent sets up a trust that leaves income to her children for life and then the remainder to her grandchildren. The part of the trust left to the grandchildren will be subject to a GST tax.

The generation skipping transfer tax exemption is set at $5.25 million for 2013, with a maximum GST tax rate of 40%.

If you leave something for the health, education, maintenance and support of your children and it’s not going to be included in your children’s estate, then anything over that $5.25M amount that you leave to your children is going to be taxed not only at that 40% estate tax level, it will also have a generation-skipping tax applied to it when transferred to the grandchildren. The generation-skipping tax is only going to apply if you have a will or trust that is specifically leaving to grandchildren.

A C trust parks money in a trust that uses your generation-skipping exemption plus your estate tax exemption, and anything above that goes into a B trust. But right now, you typically wouldn’t have an ABC trust, you would have an exempt trust that uses for grandchildren, and also provides for children.

Learn more at IRS.gov: SOI Tax Stats – Gift Tax Study Metadata