11) Short Primer on Estate, Gift & Generation-Skipping Taxes

The Stamp Tax of 1797, The Revenue Act of 1862, and The War Revenue Act of 1898 were all precursors to the modern estate tax.  These laws allowed taxes on probating wills, gross estates, and legacies.

 In 1916 the modern estate tax was enacted with the gift tax enacted in 1924. There have been many changes over the years.

 Gross estates above $12.92 million are now taxed at 40%.  In 2026, the exemption amount will fall back to $5-$7 million based upon inflation. Gross estates include all assets such as real estate, stocks, bonds, personal property etc.  Debts and charitable bequests are deductions from a decedent's estate. An estate tax return is due nine months from date of death.

 The Estate tax and gift tax are unified.  This means that the rates for estate and gift taxes are the same and when an estate tax return is filed, all previous lifetime gifts are reported.  You can either give up to $12.92 million gift tax-free during your life or you can leave it to your heirs’ estate tax -free at your death.

 There is an unlimited marital deduction for amounts left to a surviving spouse.

 In addition to $12.92 million (indexed to inflation) gift-tax free gifts made during one’s lifetime, each person can give $17,000 a year (indexed to inflation) to any other person gift-tax free. This is called the annual exclusion amount.  You can also give unlimited amounts to education institutions or healthcare facilities for education and health care expenses on behalf of others.

 The Generation-Skipping Tax (GST) tax was added in 1976. This closed a loophole where a grandparent could leave money in trust for a child and at the child’s death the money would go to the grandchild without being taxed in the child’s estate–a generation skipping event. The GST tax applies when the trust is initially funded along with the gift tax.  It effectively places two taxes on amounts left to grandchildren.

 There is currently a $12.92 million exemption amount per individual (indexed to inflation) for generation-skipping transfers (gifts from grandparents to grandchildren).  Generation-skipping transfers above this amount are taxed at the highest gift and estate tax rate of 40%.

 Always seek professional advice regarding these taxes and strategies to minimize them.

 Thanks!