The unified tax on transfers has three parts: gift tax (for transfers made during life), estate tax (for transfers made at death) and generation-skipping tax (for transfers that skip a generation).
The gift and estate taxes are imposed on an individual for gifts during life and on his or her estate for transfers at death based upon the value of the property. The result is that there is normally a separate tax as the property passes from one generation to the next. But, if property is transferred to a person two or more generations younger than the person making the transfer, one generation or more of taxation is lost. For example, a parent transfers property to a child and, to the extent that the value exceeds any exemption or exclusion, the transfer is subject to tax. The child then transfers property to his or her child and again, to the extent that the transfer exceeds any exemption or exclusion, the transfer is subject to tax. But if the grandparent skips the gift to his or her child and transfers the property to a grandchild or more remote descendant, the opportunity for taxation would be lost. To plug this hole, the Internal Revenue Code (the IRC) imposes a tax on such transfers. The current tax rate is 40%, and the exemption as to this special tax is $5 million for all such transfers (the lifetime generation skipping tax exemption), as well as an annual gift tax per-donee exclusion at $14,000.00 for 2013.
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