Overview > Typical Will Provisions > Other Instruments > Charitable Giving
Overview of estate planning concepts
The Marital Deduction
Property passing from one spouse to another spouse who is a citizen of the United States, whether by (1) a lifetime gift, (2) provisions of a will, (3) joint title, or (4) beneficiary designation, will pass free of estate tax because such transfers qualify for the presently unlimited “marital deduction.”
The Applicable Exclusion Amount
As of the end of 2009, the federal tax law provided an estate tax “credit” which offset the tax on up to $3,500,000 of assets. This means that, with proper planning, a married couple can pass up to a total of $7,000,000 ($3,500,000 from each spouse) to their heirs free of federal estate tax. As of January 1, 2010, the federal estate tax law has been repealed; there will be no federal estate tax if you die during this year, regardless of the size of your estate. The federal estate tax will then be reinstated in 2011, although with a federal Application Exclusion Amount of only $1,000,000. It is anticipated that Congress will retroactively change the federal estate tax laws to retain the $3,500,000 Applicable Exclusion Amount.
The New York State Applicable Exclusion Amount remains at $1,000,000.
Lifetime Exclusion from Gift Tax
The federal tax law provides a gift tax “credit” which offsets the tax on lifetime gifts in excess of the annual gift tax exclusion (discussed below) of up to $1,000,000.
Generation-Skipping Transfer Tax
Prior to 2010, the Internal Revenue Code penalized transfers that “skip” a generation (i.e., pass from a grandparent to a grandchild without being taxed at the child’s generation) by imposing an additional tax at a rate of 45%, referred to as the “generation-skipping transfer” (“GST”) tax. The Code did, however, allow for a maximum skip of $3,500,000 with penalty, referred to as the “GST exclusion.”
The Annual Gift Tax Exclusion
An individual may give $13,000 each calendar year to as many persons as he or she desires, free of federal gift taxes. A married couple may also “pool” their gift tax exclusions, thus enabling them to make annual joint gifts of $26,000 to each of their children and any other person(s) they may choose. Even if the $26,000 consists entirely of the assets owned individually by one of the spouses, for gift tax purposes the gift will be treated as one-half by each spouse. Such a joint gift requires the filing of a federal gift tax return even though no tax is due. The annual gift tax exclusion is indexed to changes in the Consumer Price Index.
Exclusion of Life Insurance Proceeds
Under present law, proceeds from life insurance policies are included in the estate of the insured, for estate tax purposes, if the insured is the owner of the policy or retains the power to change the beneficiary of the policy. To insulate proceeds of an insurance policy on an individual’s life from estate tax, an individual may assign ownership of the policy to the beneficiary, though preferably not a surviving spouse. Alternatively, the insured may create an irrevocable trust, over which he or she retains no control, which will “own” the policy. The person creating the trust, called the grantor, makes cash gifts to the trust periodically. The trustee uses these gifts, which qualify for the annual gift tax exclusion, to purchase and maintain the policy. To prevent “death bed transfers,” three years must pass from the date of assignment of the policy to the date of death for the insurance proceeds to be excluded from the taxable estate of the insured.
Overview > Typical Will Provisions > Other Instruments > Charitable Giving