Practice Areas • Estate Planning • Estate Tax/Gift Tax/Generation Skipping Tax Information

Jack had a $5 million gross estate. When he died, his estate had to pay in excess of $750,000 in federal and state level estate taxes. With simple planning, this could have been avoided and Jack could have passed the money tax-free to his children and grandchildren.

Under current federal law, there are three potential taxes that may be imposed when assets are transferred during life or upon death:

• Gift Tax (transfers or gifts made during life)
• Estate Tax (transfers or gifts made upon death)
• Generation Skipping Tax (GST) (transfers or gifts made during life or upon death which skip one generation and pass to the next)

Gift Tax

Generally, there is no limit to the value of assets gifted or transferred amongst spouses or to qualified charities. Tuition and medical payments made directly to the academic institution or service provider are not considered taxable gifts. In addition, the federal government allows you to gift the “annual gift tax exclusion” to any individual within the calendar year. Annual gift tax exclusions are gift and income tax free to the donor and the recipient of the gift.

In 2009, the annual gift exemption is $13,000 per person (or $26,000 for a married couple). After the applicable exclusion amount has been used, any additional gifts made in a calendar year begin to use up part of your $1 million lifetime gift exemption. Once your $1 million lifetime gift exemption has been used, any additional gifts made other than annual gift tax exclusions are subject to tax.

Estate Tax

Upon your death, the executor of your estate will examine the fair market value of every asset you owned at the time of your death (equity in your home, investment portfolio, cars, personal belongings, and life insurance). Your estate will be granted deductions for debts, administrative expenses, qualified transfers to a surviving spouse, and transfers to qualified charities. The net value of your assets at death is commonly referred to as your “gross estate”. The federal and state government allows you to pass a certain amount tax-free upon your death. This is commonly referred to as the “estate tax exemption”. However, where your gross estate exceeds the Federal and/or State exemption, your estate may be subject to tax.

The Federal estate tax may result in a tax at a rate of up to 45%. Many states (including Illinois), also impose a state level estate tax. Based on your residency, your estate may be subject to an estate tax at a rate in excess of 50%. This means that for every dollar in excess of the Federal exemption, more than 50% will go to the US Government. These high tax rates mandate that you monitor the value of your gross estate from time to time. With the proper planning, additional estate planning tools can be layered into your plan to help minimize any potential estate tax upon your death.

As shown in the chart below, the current Federal estate tax exemption for 2009 is $3.5 million. In 2010, the Federal estate tax exemption is unlimited and for 2011, the Federal estate tax exemption is scheduled to revert to $1 million.


Unfortunately, no one can predict the future tax structure, if you might become disabled, or when you will die.  Thus, it is necessary to be diligent about your planning, to be mindful of the current tax laws and evaluate your gross estate based on current and future values.  For example, if your current gross estate is valued at approximately $3 million, you may think it is unnecessary to incorporate advanced estate planning tools.  However, an estate valued at $3 million may appreciate to $10 million in the future.  Therefore, you need to examine the value of your gross estate not only in today’s terms, but also based on forecasted future growth.