It is difficult to compare gift vs. estate vs. generation skipping tax rates and how they are computed, especially considering the “inclusive” vs. “exclusive” treatment of various pieces. So I did a calculation that “normalizes” them to equivalent terms.
Assuming a taxpayer has already used up all of their exemptions and exclusions, and ignoring the three-year look-back on transfer taxes paid, if the taxpayer gifts/leaves funds to their (U.S. citizen) spouse or charity, there is no tax impact. However, if they chose to have the spouse or charity get less (by leaving or gifting it to someone else), a portion will go to tax and a portion to those recipients. This seems like a better way of thinking about the efficiency of those transfers because they are in the same terms.
In other words, at a “cost” of $X total, what percentage will the government get and what percentage will the children or grandchildren get? You might assume that the current rates, 40% for the generation skipping tax and 40% for gift/estate tax, will equal 80% if both apply; but it is a lot more complicated than that.
The short version below is ranked in order of efficiency:
|Type of Transfer||Effective Tax Rate|
|Gift to Children||28.60%|
|Bequest to Children||40.00%|
|Gift to Grandchildren||44.40%|
|Bequest to Grandchildren||57.10%|
Of course, many options are available for planning around those rates, but I do think the comparison is interesting, and I haven’t seen it laid out this way anywhere else. Also, if the asset is an IRA or something similar that is considered IRD (Income in Respect of a Decedent) you will have income taxes to contend with as well (and an offsetting deduction for the federal estate taxes attributable to the IRD asset).