Estate Resources

Tax Planning and Trusts

When Congress passed the Economic Recovery Tax Act of 1981 (ERTA), several major changes were made to the wealth transfer taxation scheme. Further changes resulted from the Taxpayer Relief Act of 1997 (TRA), the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA) and Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

An unlimited marital deduction was created for all transfers by gift, trust, or inheritance between husband and wife, so long as the parties are legally married and each is a U.S. citizen.

An annual gift exclusion of $13,000 is the amount any person can give to another person in a single tax year without any federal gift tax consequence. The TRA has provided an adjustment for inflation, but only in increments of $1,000. The number of gifts per year to different people is currently unlimited. A married couple can give $26,000 if they file a gift tax return.

A unified credit for estate and gift taxes is available to all citizens. The unified credit creates an effective lifetime exemption equivalent of $5,000,000, which is the amount any citizen can pass by gift or inheritance totally free of federal estate or gift tax (2011 tax year).

By proper tax planning, a husband and wife will eventually be able to pass an estate of $10 million free of federal estate and gift tax. This may only be achieved properly through a trust. In addition, the trust must be properly drafted to take advantage of the constantly changing Federal and State laws.

In Oklahoma, $3,000,000 can be passed free of state estate tax. However, this exemption applies primarily to lineal and collateral heirs--parents, children, grandchildren, great-grandchildren, etc. Other heirs receive some exemptions as well. A Spouse pays no state estate taxes.

The generation-skipping transfer tax is a flat 35% tax designed to penalize transfers to a younger generation which have skipped an intervening living generation, such as grandparent to grandchild, bypassing the child. The GST tax lifetime exemption is $5 million in 2011-2012.

Key points to remember:

  • Transfers by gift or inheritance to a spouse are free of tax
  • Oklahoma has no gift tax
  • Gifts of $13,000 per person per year are free of federal gift tax
  • Every person can pass up to $5,000,000 free of federal estate or gift tax (2011-12 tax year)
  • Federal estate and gift taxes range are 35%
  • The Oklahoma estate tax exemption is $3,000,000 for lineal and close heirs
  • The GST exemption is $5,000,000 and the tax is 35%
  • A QTIP Trust permits a married couple to retain the marital deduction while protecting the children's inheritance from future second spouses

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