An estate tax is a charge upon the decedent's estate, regardless of how it is disbursed. Taxes imposed upon death provide incentive to transfer assets before death. This is because under the current tax laws it is cheaper. Although it is a unified system because the gift tax is tax exclusive which means you do not have to pay a tax on the tax it is less costly then on an estate tax which is tax inclusive.
The best strategy is to utilize a taxpayers annual exclusion which is currently $10,000 indexed for inflation. By giving away up to 10k as a present interest gift the property is not in the estate and passes free of tax.
Gift tax laws are generally designed to prevent complete tax avoidance. The Federal Estate Tax is unified with the Federal Gift tax so that large estates cannot be shielded from taxation by lifetime giving.
The Federal Estate Tax is set forth beginning in § 2001 of the Internall Revenue Code. (26 U.S.C. 2001). The Federal Gift Tax is set forth beginning in 26 U.S.C. 2501. Generally, the Gift Tax applies to any transfer made without receiving value in return and without regard to intent.
The new tax law increase the amount of the Unified credit against tax. It is 675,000 currently but will increase to a million in 2002 and continue to be increased until the estate tax is ultimately repealed entirely in 2011. The gift tax however will remain at that time with a million dollar credit in most cases. In 2012 the tax will revert back to a $1 million for estate tax as well unless further action is taken.
The value of property in any event is what a willing buyer will pay a willing seller neither being under compulsion to buy or sell and both having knowledge of all relevant facts.
Through the use of limited partnerships, annual exclusions and irrecable life insurance trusts taxpayers can further minimize their estate and gift tax.
This paper intentionally does not address the marital or charitable deductions although these...
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