The United States government imposes a tax on all gratuitous transfers of property. The gift tax is assessed on transfers made during lifetime, and the estate tax is assessed on transfers that occur at death. In addition, transfers to grandchildren or more remote descendants (or unrelated persons in the same generation as grandchildren) are subject to an additional tax known as the generation-skipping transfer (“GST”) tax. While some states also impose transfer taxes of their own, South Carolina does not currently have a separate gift, estate, or GST tax.

Any property left to a surviving spouse who is a U.S. citizen will not be subject to taxation until the spouse’s later death. In addition, any assets given to qualifying charitable organizations will pass free of estate and gift taxes.

Gift Tax.  If you make a transfer during your lifetime that is not covered by an applicable exclusion or exemption, the federal government will tax the transfer at up to 46%.

1. Annual exclusion.  You may transfer up to $13,000 each year to as many different persons as you wish to benefit without occasioning any gift tax liability or the need to file a gift tax return. This amount is indexed for inflation and will likely increase in the future. In order to qualify for the annual exclusion, a gift must convey a “present interest” to the recipient. Because of this, gifts in trust generally do not qualify for the annual exclusion. However, if you are interested in making lifetime gifts to grandchildren or other minor beneficiaries, we can discuss special trusts (e.g., Crummey trusts or 2503(c) minority trusts) into which gifts can be made that will qualify for the annual exclusion. Certain transfers to Section 529 plans to fund future education expenses can also qualify for the annual exclusion.
   
   
2. Lifetime exemption.  You also have a separate lifetime exemption from the federal gift tax of $1,000,000 that can be applied to transfers you might wish to make to any one or more persons. While no tax would be owed on account of such transfers, if a particular transfer exceeds the available annual exclusion, you would have to file a federal gift tax return (Form 709) to report the gift and apply some of your exemption to cover it. Your lifetime exemption amount is not reduced by any annual exclusion gifts you may make.
   
   
3. Tuition and medical expenses.  You may also pay medical or tuition expenses for any individual without having to use any of your lifetime exemption or your annual exclusions, but these payments must be made directly to the medical provider or the educational institution. Care must be taken to ensure that the specific requirements of the Internal Revenue Code are met in this regard so that you are not deemed to have made a gift to the intended beneficiary.
   
   

Estate Tax.  Transfers made at death are also potentially subject to taxation. The amount that is exempt from federal estate tax is currently $3,500,000 but this amount is scheduled to fall back to $1,000,000 in 2011. (Under current law there will be no estate tax in 2010.) These amounts are all reduced by taxable gifts you have made during your lifetime, if any. Thus, if you died in 2009 and had used $500,000 of your lifetime exemption from gift tax, you could leave $3,000,000 at death without occasioning any estate tax. The estate tax rate is now effectively a flat 45%.  A significant change or extension of the federal estate tax laws is expected in 2009.

GST Tax.  In addition to the estate and gift taxes, there is an additional tax assessed on all gifts to grandchildren or more remote descendants (and other select recipients). This tax is designed to ensure that wealth is taxed once at each generational level. You have an exemption from the GST tax equal to your estate tax exemption. There is also an annual exclusion from the GST tax. If you are interested in making lifetime gifts into trusts for minor grandchildren, it will be important to consider drafting the trusts so that amounts contributed qualify for both the gift tax annual exclusion and the GST annual exclusion. With careful planning, it is possible to keep property in trust for the benefit of your descendants for many generations without it being reduced by estate or GST taxes.

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