Question

You have been asked to explain how the time value of money affects the application of the Federal unified transfer taxes for a presentation at your school's homecoming seminar.

To help you prepare for the presentation, select either "Yes" or "No" to indicate how the time value of money affects the application of the Federal unified transfer taxes.

a. The Federal unified transfer tax system is unified and cumulative in effect. b. Gift tax liability incurred represents a postpayment of the individual's later estate tax. c. Tax prepayments decrease the present value of the transfer tax assessed of the transferred assets. d. To reduce the present value of transfer taxes, consider making asset transfers that do not incur the generation-skipping tax.

Answer 1

The federal unified transfer tax is a tax that taxes the transfer of assets from the death of one individual to their chosen beneficiary. It is important to note that the Internal Revenue Service imposes estate tax on assets left to heirs, but the law does not apply to the transfer of assets to a surviving spouse. The term unified transfer tax also refers to when assets are transferred from one individual to another without receiving anything or receiving less than market value in return. It is the combination of both these taxes that creates the unified transfer tax. The unified transfer tax is a kind of transfer tax, which means it is a kind of tax levied on the transfer of ownership or title to property from one entity to another. The Internal Revenue service oversees the regulations of the unified transfer tax.

The federal unified transfer tax is divided into two part as below:-

1. Gift Tax
2. Estate Tax

1. Gift Tax: - The federal gift tax applies to transfers made while a person is living and is 40 percent of any amount gifted over $15,000 in a given year. It applies to the giver of the gift, not the individual receiving it. For an asset or amount to be considered a gift the receiving party cannot pay the giver full value for the gift. The gift tax excludes gifts to one's spouse, gifts to a political organization for use by the political organization, gifts that are valued at less than the annual gift tax exclusion for a given year and medical and educational expenses

2. Estate Tax : -The estate tax levied on an heir's. This estate tax only applies if the value of the estate exceeds the exclusion limit set by law. That act is referred to as an unlimited marital deduction. For beneficiaries, the limit is quite high, however. As of 2018, the Internal Revenue Service requires estates exceeding $11.18 million for singles and $22.4 million for married couples to file a federal estate tax return and pay estate taxes within nine months of a person’s death.

1. The Federal unified transfer tax system is unified and cumulative in effect.

The federal unified transfer tax is a tax that taxes the transfer of assets from the death of one individual to their chosen beneficiary .The estate tax applies to a decedent’s gross estate, which generally includes all the decedent’s assets, both financial and real . It also includes the decedent’s share of jointly owned assets and life insurance proceeds from policies owned by the decedent.

2. Gift tax liability incurred represents a post payment of the individual's later estate tax.

The federal gift tax applies to transfers made while a person is living and is 40 percent of any amount gifted over $15,000 in a given year. It applies to the giver of the gift, not the individual receiving it. For an asset or amount to be considered a gift the receiving party cannot pay the giver full value for the gift. The gift tax excludes gifts to one's spouse, gifts to a political organization for use by the political organization, gifts that are valued at less than the annual gift tax exclusion for a given year and medical and educational expenses

3. Tax prepayments decrease the present value of the transfer tax assessed of the transferred assets.

Special provisions reduce the tax, or spread payments over time, for family-owned farms and closely held businesses. Estates that satisfy certain conditions may use a special-use formula to reduce the taxable value of their real estate, often by 40 to 70 percent. Family-owned businesses may often claim valuation discounts on the logic that when a business (including, potentially, one only passively investing in liquid assets) is divided among many heirs, the resultant minority stakes may have a market value less than proportional to the total value of the business. When farms or businesses make up at least 35 percent of a gross estate, the tax may be paid in installments over 14 years at reduced interest rates, with only interest due during the first five years.

4. To reduce the present value of transfer taxes, consider making asset transfers that do not incur the generation-skipping tax.

Congress enacted the GST tax in 1976 to prevent families from avoiding the estate tax for one or more generations by making gifts or bequests directly to grandchildren or great-grandchildren. The GST tax effectively imposes a second layer of tax (using the exemption and the top tax rate under the estate tax) on wealth transfers to recipients who are two or more generations younger than the donor.