Understanding the Basics

The Applicable Exclusion Amount

Your estate tax situation will depend on how large your estate is when you die. The law allows you to transfer a certain amount of assets free of estate and gift tax. This amount is called the "applicable exclusion amount." In 2015 every person may transfer assets at death valued in the aggregate at $5.43 million ($5.34 million in 2014) free from estate tax. For lifetime transfers— i.e., gifts —the applicable exclusion amount is the same. The total amount used during your lifetime against your gift tax in effect reduces the credit available to use against your estate tax.

The value of assets excluded from estate tax is (are) as follows:


Applicable Exclusion Amount









SUGGESTION: Your estate plan should consider the increases in the applicable exclusion amount. Revisit wills and trust documents to determine if changes are required. Married couples should ensure that they have enough assets in their own names in order to take full advantage of the exclusion amounts.

The Generation-Skipping Transfer Tax (GST) Exemption

A generation-skipping transfer (GST) is the transfer of property, directly or in trust, to an individual who is two or more generations below the transferor. For example, a transfer from a grandparent to a grandchild is considered a GST. In this example, the transfer escapes one potential generation of estate and gift tax (e.g., the generation of the child). Given this potential benefit, an effective strategy would be to make transfers that skip as many generations as possible as each skipped generation would escape a potential layer of estate and gift tax. However, in order to discourage this type of estate planning, the government imposes a GST tax on the transfer.

The GST tax is imposed at a flat rate of 40% in 2015 (same in 2014), and is in addition to any estate and gift tax imposed on the transfer. The combined tax paid on a generation-skipping transfer is typically higher than the estate and gift tax that would be paid if the property were transferred down through each successive generation. However, the law allows you to transfer a certain amount of assets to a skip person without tax. This is called the GST exemption.

The GST exemption allows each individual to make aggregate transfers in 2015, by gift or at death, of up to $5.43 million ($5.34 million in 2014) (the GST exemption amount) that are entirely exempt from the GST tax. So, if you have not yet used the full amount of your gift tax exemption, consider making immediate gifts to your grandchildren (or to a trust for their benefit) up to the amount of your remaining gift tax exemption, if you can afford to do so. However, unlike the estate tax exemption, the Executor of the estate of a spouse who dies after 2010 cannot elect to transfer any of the decedent's unused GST exemption to the surviving spouse (i.e., $5,430,000 if no exemption was used during the decedent's lifetime).

GST tax is generally not applied to gifts excluded by the annual gift tax exclusion or qualified transfers for medical and tuition payments. The GST exemption amount is the same amount as the estate applicable exclusion amount. As with the estate tax, the GST was repealed in 2010, and then reinstated again in 2011.

PLANNING TIP: The use of an irrevocable life insurance trust is one of the most effective tools to leverage the GST exemption, since the exemption can be allocated against transfers into the trust, which can be set up to benefit multiple generations. Upon death, the trust is immediately funded with life insurance proceeds which can be distributed to grandchildren.

A Qualified Disclaimer

Often, it makes sense for an individual to disclaim assets rather than have the assets become part of his or her taxable estate. For example, this is often the case in larger estates where a surviving spouse has sufficient assets to provide for his or her needs and the needs of the family and thus may disclaim the assets to allow them to bypass his or her estate.

A disclaimer can also be used where the first spouse to die is not utilizing the applicable credit, since all of the assets of the first spouse pass under the will to the surviving spouse. The disclaimer enables the assets to remain in the first estate and take advantage of the applicable credit.

A "qualified disclaimer" is an irrevocable and unqualified refusal to accept an interest in property and must satisfy certain conditions, such as the disclaimer must be in writing and the written refusal must be received within nine months. Properly used, the disclaimer is a powerful planning tool that can help in managing a family's estate tax issues even after the death of the transferor of the property.

IMPORTANT NOTE: Although many people discuss using disclaimers in their estate planning, often they are established too late to be effective.

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