Estate Tax in The United States - Related Taxes

Related Taxes

The federal government also imposes a gift tax, assessed in a manner similar to the estate tax. One purpose is to prevent a person from avoiding paying estate tax by giving away all his or her assets before death.

There are two levels of exemption from the gift tax. First, transfers of up to (as of 2010) $13,000 per (recipient) person per year are not subject to the tax. Individuals can make gifts up to this amount to each of as many people as they wish each year. In a marriage, a couple can pool their individual gift exemptions to make gifts worth up to $26,000 per (recipient) person per year without incurring any gift tax. Second, there is a lifetime credit on total gifts until a combined total of $1,000,000 (not covered by annual exclusions) has been given.

If an individual or couple makes gifts of more than the limit, gift tax is incurred. The individual or couple has the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate. Generally, clients choose not to pay a gift tax until the lifetime exemption is exceeded. Paying a gift tax for gifts in excess of the lifetime exemption can be advantageous, if the client lives at least three years, as the gift tax is tax exclusive, and the estate tax is tax inclusive. Funds used to pay the estate tax are taxed in a decedent's gross estate, but gift taxes paid more than three years prior to death are not included.

But in many instances, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate, the effectiveness of which depends on the lifespan of the transferor and the number of donees. Clients often choose to use a trust, sometimes referred to as a Cristofani Trust, to hold such gifts.

Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.