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What is a Transfer Tax?

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  • Written By: L. S. Wynn
  • Edited By: L. S. Wynn
  • Last Modified Date: 09 November 2016
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The Transfer Tax is targeted at wealthy individuals and families and generates less than 2% ($30 billion) of the federal government's annual revenue ($2 trillion). It consists of the Gift Tax, the Estate Tax and the Generation-Skipping Transfer Tax ("GSTT"). Opponents of the Transfer Tax refer to these taxes cumulatively as "Death Taxes".

The Gift Tax is a tax levied on wealth transfers during the transferor's life while the Estate Tax is levied on transfers made after the transferor's death. The GSTT is a tax in addition to Gift or Estate Tax and is levied (in rough terms) on transfers made during life or after death to individuals removed by more than one generation from the transferor, for example, from a grandmother to a grandson. Usually transfer tax liabilities are paid by the transferor or the transferor's estate. Payment of Transfer Taxes by the transferor when the liability is due from the recipient is also a taxable gift.

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As of December 2002, tax rates for Gift and Estate Taxes begin at 18% and rise to 50% for gifts or taxable estates over $2.5 million under the Unified Transfer Tax Rate schedule. The GSTT is a flat 50%. Each individual is granted a Unified Credit ($345,800 in December 2002) the effect of which exempts estates under $1 million. Each individual is also granted an annual exclusion amount the effect of which exempts total gifts to any one individual during the year up to the annual exclusion amount ($11,000 in December 2002). If the transferor does not elect to pay the Gift Tax on the value of gifts totalling more than the annual exclusion amount, the individual is deemed to have used a portion of his Unified Credit. An exemption ($1.1 million in Decembeer 2002) for transfers subject to the GSTT is also granted to each individual during his lifetime. The Unlimited Marital Deduction allows (non-foreign) spouses to transfer any amount of wealth with no Transfer Tax consequences.

The Bush Administration and Congress passed The Economic Growth and Tax Relief Reconciliation Act of 2001 which reduced federal taxes across the board. The Act increased the Unified Credit and GSTT exemption amounts and provided for gradual reduction of the Unifed Transfer Tax Rate to 45% by the year 2007. In 2010 the Gift Tax will fall to 35% and the Estate Tax and the GSTT will be eliminated. In 2011 a sunset provision repeals all changes made to the Transfer Tax code and reverts to the Transfer Tax rules in place in 2001. The sudden elimination and then sudden reversion of Transfer Taxes has lead to some jokes (viewed as distasteful by some) about potential heirs sustaining the life of their benefactors until 2010. With a Republican-controlled Congress and White House in 2003, the Bush Administration is likely to seek acceleration of Transfer Tax credits, exemptions and reduced rates and/or seek to make the Transfer Tax cuts permanent. The reduction and/or elimination of Transfer Taxes at this time is particularly significant in that the largest transfer of wealth ever to be seen in the U.S. from one generation to the next will occur over the next couple of decades.

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