Estate tax, gift tax, and generation-skipping transfer tax in the USA – everything you need to know
The tax system in the United States includes a comprehensive system for taxing all asset transfers made by an individual during their lifetime and at their death. This system includes estate tax, gift tax, and tax on generation-skipping transfers. This approach ensures the taxation of wealth transfers, reduces the transfer of inequality from one generation to the next, and prevents tax evasion.
Estate Tax
The United States Internal Revenue Service (IRS) defines estate tax as a tax on the transfer of both tangible and intangible assets located within the United States. Generally, estate taxes are imposed at the federal level, but some states within the United States also levy their own estate tax in addition to the federal estate tax. Inheritance tax, on the other hand, is not imposed at the federal level, but some states impose this tax within their jurisdiction.
The estate tax applies globally to the assets of a United States citizen or a foreign citizen whose residence was in the USA at the time of death. For foreign citizens who do not reside in the United States, the estate tax applies only to their assets located in the United States, whether tangible or intangible.
It’s worth noting that banks in Israel may require an IRS certification of tax payment or exemption as a condition for withdrawing funds from an account or transferring assets to other accounts. This was also clarified in a recent announcement by Bank Leumi to its customers. This announcement comes against the backdrop of the United States’ stricter policy in recent years regarding preventing tax evasion through information sharing between countries.
The estate tax is imposed on the fair market value of all the assets owned by an individual and all the assets in which the individual has certain interests, at the time of death. The total of all these assets is the individual’s “Gross Estate.” From the gross estate, various debts (including estate management expenses, mortgages, property transferred to a surviving spouse, etc.) are deducted, arriving at the individual’s “Taxable Estate.” To this number, the value of taxable gifts given by the individual during their lifetime (starting with gifts made after 1977) is added. Finally, it is examined whether the amount exceeds the exemption amount, as detailed below.
Tax Rates and Exemptions
Federal estate tax rates in the United States range from 18% to 40%. However, American law grants an exemption from payment and reporting on inheritance up to a certain amount that is updated annually. As of 2024, the exemption applicable to a US citizen or a foreign citizen whose “residence” was in the United States at the time of death is $13,610,000. In contrast, for foreign citizens who are not residents of the United States and hold assets in the United States, the exemption is $60,000, and any excess value is subject to estate tax. In addition, the United States offers a foreign tax credit to its citizens for inheritance taxes paid in foreign countries on assets located in those countries. The deadline for paying the estate tax is within 9 months from the day of the decedent’s death.
Gift Tax
The gift tax is imposed on donors or gift givers to prevent them from avoiding estate tax payments through asset transfers during their lifetime. US citizens or individuals whose residence is in the United States are subject to gift tax on all types of gifts, regardless of where they are received. Individuals whose residence is not in the United States are subject to gift tax only on transfers of real estate and tangible personal property located in the United States.
Tax Rates and Exemptions
Federal gift tax rates in the United States range from 18% to 40%. However, American law applies two exemptions from the gift tax, an annual exemption and a lifetime exemption.
The annual exemption amount is $18,000 (as of 2024), allowing an individual to give gifts each year up to the annual exemption amount (which is updated annually) without incurring gift tax and without the obligation to file a report. This exemption applies to both US citizens and residents and individuals whose residence is not in the United States.
The additional exemption is, as mentioned, a lifetime exemption allowing a gift giver to give gifts up to a defined amount in their lifetime before imposing tax (the exemption covers both estate tax and gift tax, so any amount of the lifetime exemption used for gifts reduces the estate tax exemption available upon death). As of 2024, the exemption is up to a value of $13,610,000. Foreign residents are subject to gift tax only on gifts of tangible property located in the USA.
Generation-Skipping Transfer Tax
In addition to estate and gift taxes, there is a federal generation-skipping transfer tax in the United States. This tax prevents avoidance of estate taxes over one or more generations by making gifts or bequests directly to grandchildren or great-grandchildren. With the generation-skipping transfer tax, grandchildren receive the same amount as if the inheritance came from their parents. The generation-skipping transfer tax applies to US citizens or those whose residence is in the USA for all property transfers, anywhere. In contrast, the tax applies to those who are not US residents if the generation-skipping transfer is subject to estate or gift tax in the USA.
Tax Rates and Exemptions
The generation-skipping transfer tax rate is 40% (as of 2024). In addition, the exemption amount applicable to estate and gift taxes also applies to the generation-skipping transfer tax ($13,610,000 as of 2024). For further information on the generation-skipping transfer tax click here.
Form 706: An IRS form used by an estate executor of a decedent to calculate the value of the estate subject to estate tax and generation-skipping transfer tax. To determine whether the value of the estate exceeds the exemption amount ($13,610,000 as of 2024), the individual’s gross estate along with taxable gifts (given after 1977) combined with allowable deductions, is considered to examine whether the amount exceeds the exemption.
Form 706-NA: An IRS form used by an estate executor of a decedent to calculate the value of the estate subject to estate tax and generation-skipping transfer tax for those who are not residents of the United States but hold assets located in the United States.
Many are not aware that holding American shares above an amount of $60,000 exposes them to American estate tax, as shown, its rates are not negligible. Additionally, transferring assets during life may also be taxable given an exemption exceedance.
The assistance of a professional from the tax field can enable maximum tax savings during asset transfers in life and posthumously, as well as assist clients in dealing with financial institutions. Our team at Nimrod Yaron & Co. provides consulting, accompaniment, and planning in all relevant tax aspects of asset transfers as mentioned.
