Taxation Issues - Estate and Gift Taxes

Unified Estate and Gift Tax
The total of all taxable gifts given during a person's lifetime plus taxable amounts transferred upon death are subject to a unified estate and gift tax. Estate taxes and gift taxes are interrelated, since the federal government applies the Unified Estate and Gift Tax Credit (also known as the Unified Credit) to both types of transfers of property.
Because this area of tax law is complex, clients with large estates should be advised to work with an estate planning specialist to create an estate plan that minimizes potential taxes.

While income taxes are paid by the person who receives the income, gift and estate taxes are paid by the person or entity that transfers the money. Gift taxes are paid by the donor, and estate taxes are paid by the estate. These taxes are progressive, meaning the tax rate increases with the size of the gift or estate.

Unified Estate and Gift Tax Credit
This amount has changed significantly over the years and is scheduled for additional changes in the future.

  • The Unified Credit stayed at $600,000 for many years, until a tax-law change set it to increase to $1 million over a period of years.

  • Another tax-law change in 2001 made a significant change to the schedule. Essentially, it dramatically increases the amount of an estate that is excluded from taxation from 2001 through 2009, and then it entirely repeals the tax in 2010.

  • However, due to budget pressures, this entire schedule is effectively repealed in 2011! Unless additional legislation passes before then, the Unified Credit amount will revert to the amount under the original schedule for 2001. This makes estate planning for the wealthy client quite a challenge.

  • See the following page for a table displaying current exclusion limits.

Gift tax exclusion
The gift tax exclusion allows individuals to give away assets up to a certain value without being subject to the gift tax. For 2007, the limit is $12,000. Individuals can gift up to this amount each year to an unlimited number of people. This is one way for wealthy people to reduce their estate prior to death. A married couple can gift $24,000 per year per beneficiary.

Look Out!
This gift limit is indexed for inflation. It had been at $10,000 for many years before an indexing factor was permitted. As a result, the exam refers to the gift tax exclusion as "$10,000 indexed for inflation annually."

Gifts in excess of this annual amount may still be given free of tax. However, a gift tax return must be filed, showing the amount of the gift and the amount of the Unified Credit that is being taken. The maximum amount of lifetime gifts that can be given tax-free under the Unified Credit is $1 million. This is a lower amount than the basic Unified Credit (see the table below).

Estate tax exclusion
The maximum amount of estate value (including lifetime taxable gifts) excluded from taxation is shown in the following table:

YEAR Amount Excluded
2007 & 2008 $2 million
2009 $3.5 million
2010 Tax Repealed
2011 $1 million

Marital deduction
Not all transfers upon death are taxable. There is an unlimited marital deduction that applies to direct transfers or certain transfers in trust to the surviving spouse. Such amounts would then be subject to estate tax when the second spouse dies, unless they were gifted away or spent prior to the surviving spouse's death. The unlimited marital exclusion also applies to lifetime gifts.

Exam Tips and Tricks
Consider these sample exam questions:

  1. Which of the following gift given in one year from an aunt to her nieces would NOT be subject to gift tax?
    1. One $24,000 gift to one niece
    2. Two $12,000 gifts to two nieces
    3. Two $24,000 gifts to two nieces
    4. One $10,000 gift to one niece
    1. I only
    2. II & IV
    3. II & III
    4. I, II, III, & IV

The correct answer is "b" - since there is no indication that the aunt is married, the transfers of $24,000 would be subject to gift tax.

Related Articles
  1. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  2. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  3. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  4. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  5. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  6. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  7. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  8. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  9. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  10. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Series 79

    A examination to ensure a candidate is qualified to become a ...
  3. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  4. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  5. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  6. Series 23

    An exam offered by the Financial Industry Regulatory Authority ...
  1. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  2. Do financial advisors have to be licensed?

    Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
  3. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  4. What role does the 'chip cycle' play in the electronics sector?

    There are several highly acclaimed private Series 6 Exam courses in the United States. Many can be completed online. Popular ... Read Full Answer >>
  5. What does passing the Series 6 enable me to do?

    The Series 6, or the Investment Company Products/Variable Contracts Limited Representative, exam is administered by the Financial ... Read Full Answer >>
  6. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
Trading Center