Estate & Gift Tax

The so-called unified tax system is comprised of three federal taxes: the (1) estate tax, (2) gift tax, and (3) generation-skipping tax. Each is implemented as part of a unified tax system. The estate tax, or “death” tax, is imposed on at-death asset transfers made to friends, families, and organizations. The gift tax is a back-stop to the estate tax; it is imposed on charitable gifts made throughout a donor’s lifetime. Without the gift tax a donor could gift away all his assets before death to avoid the estate tax. The third “unified” tax, the generation-skipping tax (“GST”), is applied when (a) a gift or transfer is made to either an unrelated person 37.5 years younger or to a related person more than one generation younger than the donor (e.g. grandchild) and (b) if not for the GST, the gift or transfer would avoid the gift and estate tax completely at each generational level. Together, these three tax mechanisms are used by the federal government to raise revenue for its various spending programs.

These three taxes, implemented concurrently as a unified system since 1976, is not without controversy. Some find it unfair to tax one’s hard-earned assets that were presumably earned in an effort to “take care of loved ones.” Contrarily, unified system proponents claim that allotted exemptions to each of these three taxes are large enough that only extremely wealthy taxpayers face unified tax liability.

As it stands currently, estate, gift, and generation-skipping taxes appear to be here to stay. Accordingly, taxpayers should be cognizant of their many intricacies and interworkings.

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