Basic Federal Estate and Gift Tax Principles

All persons have a lifetime unified credit equivalent to $675,000 (in 2001) 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. For estate tax purposes, this credit will increase from $1,000,000 in 2002 to $3,500,000 in 2009. After 2010, if no legislation has been enacted, the exemption will revert to $1,000,000. For gift tax purposes, the credit will remain at $1,000,000. Please click on Economic Growth and Tax Relief Act of 2001 for a more detailed explanation. The rules referenced below apply to all years prior to 2010 and all years subsequent to 2010 if no legislation is enacted to repeal the estate tax.

Each year a person may transfer $10,000 of property per donee without paying gift taxes on such transfer. Any transfer over the $10,000 exclusion is subject to gift tax. However, a donor can make direct transfers to qualified medical and educations 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 $10,000 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 to an unlimited marital deduction.

Each individual has a $1,060,000 exemption from the generation skipping transfer ("GST") tax. Please click on Generation Skipping Transfer Tax for additional information regarding the GST tax. The exemption is personal to the taxpayer; a husband and wife should plan on using the $1,060,000 exemption so as to exclude $2,120,000 from any generation skipping tax. This credit will increase from $1,060,000 in 2002 to $3,500,000 in 2009. After 2010, if no legislation has been enacted, the exemption will revert to $1,000,000. For a summary of the Economic Growth and Tax Relief Act of 2001 click here.

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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