Estate and Gift Tax

Estate Planning: Estate and Gift Tax

Before 1986, you could have left assets directly to your grandchildren and skipped a round ofestate tax, saving potentially hundreds of thousands of dollars. But Congress closed that loophole when it enacted the Generation-Skipping Transfer (GST) Tax. Now if you leave assets directly to your grandchildren (or give annual gifts to your grandchildren in excess of $13,000 each), large estates must pay a flat 45% GST tax on the transfer. That is in addition to the applicable estate tax or gift tax, which can reach as high as 45% on transfers greater than $1,000,000.

There are four basic ways to reduce or eliminate the amount of GST tax on transfers to your grandchildren (and to your great-grandchildren if you should be so lucky): gift-tax exemptions, college tuition and medical expense payments, GST trusts, and “dynasty” life insurance trusts.

You don’t have to be super-rich to benefit from any or all of these generation-skipping strategies. If used properly, they can benefit modestly wealthy families as well. Because the rules governing GST and dynasty trusts can become quite complex, it’s important to get advice from knowledgeable financial and legal advisers. If you have grandchildren, don’t wait too long to plan your generation-skipping strategies, because your options may narrow as you get older.

Estate, Gift, and GST Tax Schedule

Year Estate tax
exclusion
Top marginal 
estate & gift
tax rates
Gift tax 
exclusion
GST tax
exemption
Basis
2004 $1.5 million 48% $1 million $1.5 million Step-up
2005 –  47% –  –  – 
2006 $2 million 46% –  $2 million – 
2007 –  45% –  –  – 
2008 –  –  –  –  – 
2009 $3.5 million –  –  $3.5 million – 
2010 N/A 0% estate tax –  N/A Carry-over +
$1.3 million
2010 N/A 35% gift tax –   N/A Carry-over +
$1.3 million
2011+ $1 million 55% –  $1.4 million (est.) Step-up

Blank cell = no change from previous year
GST = Generation-skipping tax

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