What Is a Uniform Transfer Tax?

Uniform transfer tax is the combination of federal estate taxes and federal gift taxes into a single tax.

Key Takeaways

  • A uniform transfer tax merges federal gift and estate taxes into a single tax.
  • The uniform tax credit can be used by taxpayers to reduce their estate taxes and probate costs by forgoing gift tax deductions during their lifetime.
  • Details about the uniform transfer tax, along with individual specifications of the estate and gift tax, are spelled out by the IRS.

Understanding a Uniform Transfer Tax

A uniform transfer tax covers the transfer of assets from the death of one individual to their chosen beneficiary. It is important to note that the Internal Revenue Service (IRS) imposes estate taxes on assets left to heirs, but the law does not apply to the transfer of assets to a surviving spouse.

The term uniform 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 uniform transfer tax.

The uniform 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 uniform transfer tax. Transfer taxes are usually nondeductible on one's tax returns.

Components of the Uniform Transfer Tax

Estate Tax

The uniform transfer tax combines elements of the federal gift tax and the federal 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. The tax law that oversees gift taxes is notoriously complicated but was raised to $15,000 in 2018. It has remained at this amount.

Gift Tax

The other half of the uniform transfer tax is the estate tax, which is a tax levied on an heir's inherited portion of an estate. 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 2020, the IRS requires estates exceeding $11.58 million to file a federal estate tax return and pay estate taxes. The exclusion amount rises to $11.7 million in 2021. This means that an estate of $11 million does not need to file an estate tax return. These exclusion amounts are significantly higher from previous years. In 2017, for example, taxes were owed if the estate exceeded $5.49 million.

Uniform Transfer Tax and Probate

Since the probate process can be expensive, some people would rather use the unified transfer tax to save on estate taxes after their deaths. This is done via the uniform tax credit, which integrates both the gift and estate tax credits into one tax system. It is a tax credit that decreases the tax bill of the individual or estate, dollar to dollar.

An individual or couple that plans to gift some of their assets to someone may need to file a gift tax return if the value of the assets is higher than the annual exemption amount. Gifts made to charities or to pay another person's medical or tuition expenses are exempt from gift tax return requirements.

This means that the credit will not be used for reducing gift taxes while a person is still alive, but will instead be used on the inheritance amount bequeathed to beneficiaries after death. To take advantage of this lifetime credit, beneficiaries or the decedent’s estate executor must complete IRS Form 706, which is used to figure the estate tax imposed by Chapter 11 of the Internal Revenue Code (IRC).

The unified tax credit can be used by taxpayers either before or after death. It is important to keep up to date on it as the tax credit changes frequently.