Estate Planning Taxes

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Reducing and eliminating transfer taxes and income taxes wherever possible is one of the main focal points of planning an estate. The Gift tax, Estate tax, and the Transfer tax are the main methods by which the government attempts to get its share of your final estate.

The key difference between them relates to timing: the Gift tax applies to transfers made before death, the Estate tax applies to transfers at death, and the transfer tax applies to transfers intended well after death by skipping the children's generation and leaving assets to the grandchildren and those in lower generations.

Gift Tax: This form of tax applies to funds transferred before the death of the donor. Unlimited donations of assets may be made to spouses and certain charities. Otherwise, a limit of $10,000 applies to funds donated to other organizations and individuals each year. Any gifts which do not fall under one of the above categories are considered taxable. However, no gift tax is paid until the donor reaches a cumulative lifetime gift limit. Once this limit is reached, gifts are subject to 37% to 60% taxation, depending on the amount of the donation.

Estate Taxes: A tax on the net value of the estate, including current market value of any property, and any assets, including those passed on by operation of law, through contract, or via probate less allowable deductions. This tax applies at the time of death, and generally only applies to estates worth more than a certain amount, depending on the year of death. Any properties and funds left to a spouse, provided he or she is a U.S. citizen are exempt from this tax, as are donations to certain types of charities.

For married couples, some forms of trusts, such as AB trusts, may provide some shelter from estate taxes in the event of the death of one of the spouses.

Generation-Skipping Transfer Taxes
Under a "loophole" in prior law, by skipping over the children in the final distribution of principal, a Grantor could save gift and estate tax. Now, such transfers are taxed at the maximum federal gift and estate tax rate of 55%. BUT, there is a cumulative exemption of $1,030,000 (adjusted annually for inflation) per donor that can be used to avoid tax on generation skipping transfers (by Trust or gift) during the donor's lifetime, or at death.

Also note that any gift to a natural person (as opposed to a trust) that qualifies for the $10,000 annual exclusion from federal gift and estate tax automatically qualifies for an exemption from the generation skipping tax.