Basics Aspects of the Federal Transfer Tax in Florida
Well it is 2012, the year of the Dragon, and there have been a few very minor adjustments to the federal estate tax limits. By the end of this year, there will probably be many more depending on the results from the November election. So where are we currently?
Currently, the federal government says that anytime you transfer assets to anyone during your life, you must pay a transfer tax (gift tax) unless you fall within one of their 5 exceptions. The exceptions are:
1. Transfers between a husband and wife who are U.S. citizens, are free from the gift tax. So if Bob and Susan are both U.S. citizens, Bob may transfer $1 billion to Susan and not expect to pay any gift tax. If one of them are not U.S. citizens, special rules apply. Please seek help ASAP if you have transferred assets to a spouse who is not a U.S. citizen.
2. You may transfer up to $13,000 per year per person completely tax-free. An example of this is that you may go to church this Sunday and write a $13,000 check to every person who walks past you. Your spouse may do the same. Then on January 1st of every year thereafter, you may write the same check to them. This amount increases based upon inflation in $1,000 increments. Clients usually use this type of gifting to pass assets to children and grandchildren either through outright gifts, gifts into a trust for their benefit or to pay for life insurance on the life of the client to leverage the amount of assets that will pass to the beneficiaries.
3. Every U.S. citizen has $5.120 million they can gift over their lifetime, either all at once or in smaller transfers. Last year it was only $5 million but has increased due to an inflation adjustment. So if you happen to go over the $13,000 per year amount, please make sure you file a gift tax return telling the IRS that you are borrowing against your $5.120 million.
4. You may make payments for tuition (in general but there are some limitations) in unlimited amounts. The payment must be made directly to the education provider and not go through the hands of the person whom the payment is being made for. So if Bob wanted to pay for his grand-daughter’s education to the University of Miami, he could but would have to pay the “U” directly and not first give the money to his grand-daughter for her to pay the bill.
5. Finally, you may make payments for medical expenses (generally but again with some limitations) in unlimited amounts. Just as with the tuition payments, the payments for medical expenses must be paid directly to the health care provider and not pass through the hands of the person whose bill is being paid.
(If you have accidentally paid the money to the beneficiary under #4 and #5 above and the payment was more than $13,000, please make sure to seek tax counsel to see if you must file a gift tax return.)
If you do not fall within one of the 5 exceptions listed above, you must pay a 35% tax on the value of assets transferred. If the transfer was in cash, or stocks that is easy to value. If the asset transferred was a real estate interest or a business interest, make sure you get a proper valuation on the asset done so that you can prove to value of the transfer should the IRS come knocking on your door.
I will discuss the estate and generation-skipping tax in my next blog.
To learn more about estate taxation and how to avoid it, please contact our estate planning attorney at Wood, Atter & Wolf, P.A. located at Jacksonville and Ponte Vedra Beach, Florida.
