Estate and Gift Taxation

This Is A Member-Only Page
Invest Web Homepage

A gift tax is imposed on lifetime transfers by gift, and an estate tax is imposed on transfers at death. Since 1976, the gift and estate taxes have been unified so that a single, graduated rate schedule applies to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death. The Taxpayer Relief Act of 1997 made several important changes.

Unified Estate and Gift Tax Exemption

Since January 1, 1998, the previous $600,000 individual unified estate and gift tax exemption has been scheduled to increase in a series of steps and will continue to do so until it reaches $1 million in 2006. The exemption is not indexed to inflation and is phased in as follows:

January 1 , 1998    $ 625,000

January 1 , 1999    $ 650,000

January 1 , 2000    $ 675,000

January 1 , 2002    $ 700,000

January 1 , 2004    $ 850,000

January 1 , 2005    $ 950,000

January 1 , 2006    $1,000,000

However, under the Tax Reduction Act of 2001, the estate tax goes away in 2010, and for 2002 the unified credit jumps immediately from $675,000 to $1 million. The new bill increases the credit to $2 million in 2006, $3.5 million in 2009 and phases it out completely in 2010.

These changes do not reduce the need for estate planning. The obvious way to reduce the value of a taxable estate is still to make gifts while alive.

Other Gift Tax Provisions

Currently, an individual can gift up to $10,000 to a single recipient in a given tax year. Beginning on January 1, 1999 and annually thereafter, this exclusion will be indexed for inflation.

Family-owned Farms and Businesses

Closely-held family‑owned businesses have found themselves in situations like this: upon Dad's death, family members inherit an estate worth millions of dollars, but the bulk of the estate's value is a profitable business concern; and the only way to pay the estate taxes is to sell the business to raise the necessary cash.

Also beginning in January 1, 1998, executors may elect special estate tax treatment for qualified family-owned business interests, but only if those interests comprise more than 50% of the decedent's estate, and certain other requirements are met. A qualified family‑owned business is any interest in which the decedent's family has a least a 30% interest, and the business in its entirety is held at least 50% by one family, 70% by two families, or 90% by three families.

The Act combines this credit with the unified estate and gift tax credit for a total credit of $1.3 million beginning in 1998. Consequently, the amount of this exclusion that will be available each year will decrease as the value of the unified credit increases through 2006. Refer to Figure 4‑5 on the following page, which summarizes the combined effect of this credit with the unified credit.

COMBINED ESTATE, GIFT AND FAMILY-OWNED BUSINESS CREDIT