Basic Federal Estate, Gift and Generation Skipping Transfer Tax Principles

All persons have a lifetime unified credit equivalent of $5,430,000 (for 2015) of property which may be transferred to others without the payment of any estate or gift taxes. An individual cannot transfer his exemption to another individual. However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 does allow the unused portion of the exemption from a decedent to be used by the estate of the surviving spouse on their subsequent death. This is called "portability." To ensure portability a timely filed Federal Estate Tax Return (Form 706) should be filed upon the death of the first spouse.

Each year a person may transfer $14,000 of property per donee without paying gift taxes on such transfer. Any transfer over the $14,000 exclusion is subject to gift tax. However, a donor can make direct transfers to qualified medical and education institutions for the benefit of a donee's education and medical benefits without being subject to gift tax.

For gifts to a trust to qualify for the annual gift tax exclusion the trust must grant the beneficiaries a lapsing limited power to withdraw annual additions to the trust. These powers are referred to as "Crummey powers." Consequently, annual additions utilizing the $14,000 per donee annual gift tax exclusion can be made to a trust.

Transfers between spouses are not taxable because of an unlimited marital deduction, except where the property transfer is to a surviving spouse who is not a U.S. citizen. However, a qualified domestic trust ("QDOT") which meets certain requirements can be established for the benefit of the non-citizen surviving spouse which will entitle the marital transfer of an unlimited marital deduction.

Each individual has a $5,430,000 exemption from the generation skipping transfer ("GST") tax in 2015. The GST tax is generally a tax that applies when assets are transferred directly to grandchildren or in a trust where a grandchild is a beneficiary. The exemption is personal to the taxpayer; a husband and wife should plan on using the $5,430,000 exemption so as to exclude $10,860,000 from any generation skipping tax. It is very critical that GST is addressed in all estate plans and all estate planning transactions. The tax leverage can be substantial if properly addressed. It is critical the GST exemption be properly allocated on a Federal gift tax return to be certain that the required benefits will be accomplished. We work with CPAs on a frequent basis in assuring that GST exemption is properly planned and reported to the Internal Revenue Service.

In structuring the estate plan, the two key estate planning tools which should be taken advantage of are the unified credit and the unlimited marital deduction. If the unified credit is established in the form of a trust, it is often referred to as the "Credit Shelter" or "By-Pass" trust. If the marital portion is established in the form of a trust, it is often referred to as a qualified terminable interest property trust ("QTIP Trust").

The estate plan can be accomplished through various instruments, including credit shelter wills or individual revocable credit shelter trusts. With wills, the estate plan goes into full effect at death and wills are changeable until such time. With revocable credit shelter trusts, the trust estate would be created upon execution.


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