Retirement Accounts - Federal Estate and Gift Tax

You will also need to be familiar with federal estate and gift tax considerations for the Series 7 exam

Unification of Gift and Estate Taxes
A credit is an amount that eliminates or reduces tax. It used to be that the same unified credit amount applied to both the gift tax and the estate tax, but under current law there is a unified credit against taxable gifts and a separate unified credit against estate taxes.

  • Here, "unified" means that there is a lifetime maximum, rather than an annual maximum, for each credit.

  • These credits are defined in terms of how much tax is avoided, not how much the gift or bequeathal is worth.

  • The unified credit against taxable gifts is $345,800, exempting $1 million from tax. This figure is unlikely to change between 2005 and 2009.

  • The unified credit against estate tax; however, increases in steps during the same period from $555,800, exempting $1 million in bequeathals, to $1,455,800, exempting $3.5 million.

The general rule is that any gift is taxable except the following:

  • Gifts of less than $11,000
  • Someone else's tuition or medical expenses paid directly to a school or hospital
  • Gifts to one's spouse
  • Gifts to a political organization
  • Gifts to charities
  • For a married couple, each spouse can separately give up to $11,000 to the same person.

What Comprises a Person's Taxable Estate?
A person's taxable estate is his or her gross estate minus allowable deductions. Gross estate includes the value of all property in which your late client had an interest at the time of death, plus the following:

  • Life insurance proceeds payable to the client's estate or heirs
  • The value of certain annuities
  • The value of certain property transferred within three years before your client's death

Allowable deductions used in determining taxable estate include:

  • Funeral expenses
  • Debts owed at the time of death
  • Value of property that passes from the deceased to the surviving spouse

Lifetime Exclusion
The total amount of gift tax credit used during life reduces the credit available to use against estate tax. However, any unified credit not used to eliminate gift tax can be used to eliminate or reduce estate tax.

Custodial Accounts


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