There are two main tax regimes you’ll face with regard to your estate: Income Tax and the Transfer Taxes.
The Transfer Tax regime includes the Estate Tax, the Gift Tax, and the Generation-Skipping Tax. These taxes tax you again on value that has likely already been income taxed, when you direct that value to any third person, but with the following exceptions:
- Every year you can give up to a certain amount to each individual recipient without owing any Gift Tax. This is called the Annual Exclusion Amount, and is currently, as of this writing, at $19,000 per year. If you give more than that to any one recipient, you must file IRS Form 709 — the Gift Tax form — and report the amounts in excess of the Annual Exclusion Amount that you gave. You would normally, then, owe a tax on that transferred amount, except for the additional shelter of the…
- Lifetime Exclusion Amount. This is the total amount of value that any one person can pass to other people during their entire lifetime without paying a Transfer Tax of any kind. As of this writing, that amount is about $14,000,000. So if you gave lifetime gifts above the Annual Exclusion amount where a Form 709 was required and a Transfer Tax other wise due, those amounts otherwise owing are absorbed by the Lifetime Exclusion Amount, so no Transfer Tax will be owed until the total amount transferred during life and at death exceed that Lifetime Exclusion Amount.
- Charitable giving is Transfer Tax exempt.