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Estate & Gift Tax Planning

Assets above a certain exempted amount which pass to children or other beneficiaries at death are subject to what is known as the estate tax.  In order to prevent avoidance of the estate tax by making pre-death transfers, a corresponding tax called the gift tax is also imposed on lifetime gifts, again when they exceed a certain threshold.

Historically, a single lifetime amount was established which could be claimed to exclude either estate or gift taxes.  The estate and gift taxes were therefore often referred to as being "unified," with the combined lifetime exclusion for both taxes being referred to as the "unified credit."  However, since recent changes in the law have created different exemption amounts for estate taxes versus gift taxes, the current term for this is the "applicable credit amount," and the amount of assets which can pass without tax in light of that credit is called the "applicable exclusion amount" or AEA.

Not long ago, the "unified credit amount" / AEA (i.e., the dollar amount of assets exempted from the estate and/or gift tax) was only $600,000, meaning that all assets of any kind passing to a beneficiary by way of either inheritance or gift in excess of that amount would be subject to taxation.  Furthermore, the tax rates were quite high, with the top rates typically in excess of 50%!  This combination of circumstances created a powerful incentive for careful estate planning, and planners developed a range of tools and techniques designed to minimize or eliminate estate and gift tax liability.

Over the past 10-20 years, there have been a number of changes to the estate and gift tax rules.  Currently, the AEA has been temporarily increased to $5 million, and the top estate tax rate raised to 35%.  However, as has often been true in recent years, these changes have been passed with "sunset provisions," meaning that the law will revert back to prior law beginning on January 1, 2013 (under which the AEA will only be $1 million and the top tax rate 55%).

Frequent recent changes in the estate and gift tax law combined with "sunset provisions," along with the volatility of our modern political climate, have made planning more challenging, but it has in many cases also created unique opportunities.  Furthermore, we would contend that the uncertainty of what will happen with the law going forward is likely to continue, and that it makes careful planning more important than ever.

If you may be in a position to incur estate or gift tax liability, we can offer strategies to minimize or possibly eliminate those taxes, and maximize the value of your legacy to your family and loved ones.  Contact us today for an initial consultation to begin the process.

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