Estate Gift & Tax

What is the Estate Tax? | What is the Gift Tax? | How should I plan if my Estate will not be subject to Estate Taxes?

What is the Estate Tax?

The estate tax is a tax on a decedent’s assets at the time of his death. All assets held by the decedent are included in determining the decedent’s taxable estate, including real estate, securities (stocks and bonds), bank accounts, retirement accounts, assets in a living trust, and sometimes life insurance. Generally, the status of the beneficiary is irrelevant; if a decedent had assets greater than the amount excluded from estate taxes (the “applicable exclusion amount”), there will be a tax. However, gifts to charities and spouses, who are citizens of the U.S., are free of tax.

The estate tax is due nine months after the decedent's death. The estate tax is separate from and in addition to any income taxes that are due annually on April 15.

On June 7, 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA - 2001). This law dramatically increased the size of the applicable exclusion amount, and repealed the estate tax in its entirety for the year 2010. However, if Congress doesn't act to prolong the effect of the law, the estate tax will be re-introduced in 2011 with the tax exclusion amounts and rates equal to that of 2002.

Current Tax Rates

Size of Estate Tax Rate Tax Burden
$2 million 45% 45% of amount above $2 million


Scheduled Growth of the Applicable Exclusion Amount & Decline in the Maximum Tax Rate

Year Applicable Exclusion Amount Tax Rate
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 $1 million 55%


California does not have a separate inheritance tax. Previously, the federal government allowed the states to “pick up” a portion of the estate tax for themselves. Effective 2005, no estate or inheritance tax is being forwarded to the states. Some states have established their own inheritance or estate tax. A California constitutional amendment would be required for there to be a new California inheritance tax.


What is the Gift Tax?

The Gift Tax is an additional tax designed to discourage wealthy persons from making large gifts to family members during their lifetime, to avoid an estate tax on the same assets at death. Each person may give up to $1,000,000 during his lifetime without paying any Gift Tax. On April 15 of the year following the gift, the donor must file a “Gift Tax Return” to record his use of a portion of his $1,000,000 credit. Any amount used during lifetime will reduce the applicable exclusion amount available at the donor’s death.

In addition to the lifetime credit, a donor may make gifts of up to $12,000 to anyone in each calendar year. Wealthy people with large families can give hundreds of thousands of dollars away every year by use of the $12,000 exemption. The donor must be very careful if he intends to gift assets that are hard to value (such as real estate or business interests) or wishes to make gifts to minors.

There are additional, sophisticated techniques if a wealthy donor wants to make large gifts to family members or charity. If you believe an Irrevocable Life Insurance Trust (ILIT), Charitable Remainder Trust (CRT), Qualified Personal Residence Trust (QPRT) or any of the other advanced planning techniques may be appropriate for you, please contact me to schedule an appointment.


How should I plan if my Estate will not be subject to Estate Taxes?

Since the credit from estate taxes is now $2 million per person, most estates (even in Silicon Valley) are not subject to the estate tax. However, this does not mean that proper planning can be ignored. If you fall into any of the following categories, you should consider establishing a living trust that will focus on controlling the beneficiaries of your estate and avoidance of probate, rather than directed by tax planning:

  • Have Young Children
  • Have Children from Prior Marriages or Relationships
  • Own Substantial Separate Property
  • Would Prefer to Leave Your Property to Non-Family Members
  • Have Concerns about the Persons who may Manage your Estate
  • Own Real Property (especially if located in multiple states)

Trusts can be drafted to provide an education fund for your children, but leave the bulk of the funds in the care of a trusted relative or friend until each child is of a more mature age (such as 25 or 30). If you have substantial separate property, it may be to your advantage to structure a trust that will provide health care and maintenance to your spouse, but leave any remaining principal at your spouse’s death to your family line (not your spouse's family). Please contact me to discuss your particular concerns about your family, so that together we can craft an estate plan that truly reflects your wishes.

** Any information contained in this website was not written, is not intended to be used, and cannot be used by any taxpayer for the purpose of avoiding any federal tax penalties that may be imposed upon the taxpayer. (See IRS Circular 230) **

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