Estate and Gift Taxes

FEDERAL ESTATE AND GIFT TAXES AND PLANNING

Note:  The following discussion very briefly addresses gift, estate, and generation skipping taxes as of 2011 and through 12-31-2012.  (H.R.4853 -- Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 -- "sunsets" after 12-31-2012.)

Federal tax is imposed upon the gratuitous transfer of property during life (gift tax) or upon death (estate tax). The two transfer taxes have been "unified" (i.e., the rates for both are based upon the value of property gratuitously transferred and these rates are the same for both estate and gift tax).  For 2011 the "unified credit" for gift and estate tax purposes shelters $5,000,000 from those taxes; for 2012 that $5,000,000 is indexed for inflation.

A deceased spouse may leave all of his property to the surviving spouse and the surviving spouse may then use the deceased spouse's unused "unified credit" in addition to his or her own; this means that the surviving spouse may leave up to $10,000,000 free of estate tax (assuming that neither spouse made taxable gifts during lifetime).

The rate of tax is progressive, starting at 18% and working up to 35% (for gifts and bequests totaling over $500,000).

In addition to the "unified credit" against the gift tax, a person may give $13,000 annually to as many persons as he or she wishes so long as those gifts are of a "present interest." (This "annual exclusion" amount is indexed for inflation, going up only in $1,000 increments.)

California has no gift or estate tax.

There is a third tax that applies both to lifetime and death-time gifts -- the generation skipping tax. This is a complex tax scheme that imposes a flat tax on transfers to or for the benefit of grandchildren (and those of that generation). The rate of that tax is equal to the maximum estate tax rate (35%). There is a generation skipping tax exemption equal to the estate tax exemption, so a grandparent could have given up to $5,000,000 to his or her grandchildren in 2010 without paying generation skipping tax (although generation skipping gifts and bequests will continue to be subject to gift and estate tax).