Estate Planning For Dummies
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The federal tax system includes a gift tax, generation skipping transfer tax (GSTT), and estate (death) tax that work together to make as much of your estate as possible disappear. The laws and rules for these three federal taxes created some confusing relationships among them. Your estate-planning team — particularly your accountant and your attorney — can help you make sense of the odd relationships among these taxes:

  • The gift tax: The federal gift tax is imposed on taxable gifts that you give to others. If you try to avoid estate taxes by giving away a significant portion of your estate while you’re still alive, the government applies a tax on those gifts.

    The sort-of-good news is that you have a variety of exemptions and allowances to work with in your gift giving to help you minimize the actual tax bite or even escape the tax bite completely in some cases. Also, even if you make taxable gifts, you may not ever have to write a check for the amount you owe n gift taxes because you can credit the amount of gift tax you owe against any down-the-road estate tax after you die.

  • The generation skipping transfer tax, or GSTT: The GSTT closes a loophole that the upper class has used to reduce estate taxes. Members of very wealthy families can use a variety of tactics to help shelter family wealth from a tax bite. For many years, wealthy people directly transferred some of their property to members of lower generations — for example, to grandchildren rather than children.

    The GSTT closes generation skipping loophole (at least, GSTT proponents position and explain the tax that way) by adding an additional tax — and at pretty hefty rates — to property transfers that can be classified as generation skipping to make up for the amount of tax that you’re trying not to pay.

    The good news, though, is that you have a sizable exemption amount to work with, and you can work with your attorney and accountant to minimize the GSTT bite.

  • The estate (death) tax: Good news! The federal estate tax is scheduled to go away in 2010. You still need to worry about the federal estate tax, no matter how big (or small) your estate is. The death of the estate tax may only be for a single year. Unless Congress explicitly acts to extend the federal estate tax repeal (meaning that 2010 has no estate tax), the estate tax comes back in 2011. And to make matters worse, the amount of your estate that is exempt from estate taxes — in 2009, that amount is $3.5 million after rising steadily throughout the decade — goes back down to the 2002-2003 amount of $1 million.

About This Article

This article is from the book:

About the book authors:

N. Brian Caverly, Esq., is an attorney-at-law emphasizing estate planning and elder law. Jordan S. Simon is Vice President of Asset Management at Venture West, a Tucson-based investment firm.

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