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Frequently Asked Questions

What is the estate tax?

The estate tax is a tax on a testamentary (at death) transfer of wealth.

What is the gift tax?

The gift tax is a tax on an inter vivos (during lifetime) transfer of wealth.

What is the generation-skipping transfer tax?

The generation-skipping transfer (GST) tax is a tax on a transfer of wealth that skips one or more generations, e.g., from grandparent to grandchild. However, what actually constitutes a generational skip for transfer tax purposes is defined by a complex set of rules in the Internal Revenue Code and the Treasury Regulations. Note that the GST tax is incurred in addition to the gift tax or estate tax on a generation-skipping transfer of wealth.

What is the basic exclusion amount?

The basic exclusion amount is the initial amount of wealth that each taxpayer may transfer free of tax. In 2018, each taxpayer has a basic exclusion amount of $11,400,000, which is indexed for inflation annually.  However, on January 1, 2026, the basic exclusion amount is scheduled to decrease to $5,000,000 adjusted for inflation.

What is the deceased spousal unused exclusion amount (DSUE Amount)?

The deceased spousal unused exclusion amount (DSUE Amount) is the unused exclusion amount of your last deceased spouse. If you are a surviving spouse, you may add the DSUE amount of your last deceased spouse to your basic exclusion amount only by timely filing an estate tax return for your deceased spouse, which is referred to as “portability” of the DSUE Amount.

What is the applicable exclusion amount?

The applicable exclusion amount is the total amount of wealth that each taxpayer may transfer free of tax; and it is the sum of the taxpayer’s basic exclusion amount and any DSUE amount claimed from his or her last deceased spouse.

What is the tax rate on wealth transfers and how much may I transfer without being taxed?

In 2018, the maximum rate for gift tax, estate tax, and generation-skipping transfer tax purposes is 40% on cumulative lifetime and testamentary taxable gifts that exceed $11,400,000.

What kinds of lifetime gifts are not taxable?

Each year a taxpayer is permitted to make an unlimited number of tax-free “annual exclusion gifts.” An annual exclusion gift must be a gift of a present interest. In 2019, the annual exclusion amount remains $15,000 per recipient; and this amount is non-cumulative. For example, if a married couple has 2 children, mom and dad may combine their annual exclusion gifts to give each child $30,000 this year, irrespective of any amount that they gave their children last year. If you make a gift of a present interest of more than $15,000 to an individual in a calendar year, the excess is a taxable gift that must be reported to the Internal Revenue Service by April 15 of the following year.

A gift made in trust that may not be enjoyed by the beneficiary immediately is a gift of a future interest, which does not qualify as a tax-free annual exclusion gift. However, a gift of a future interest may be converted into a gift of a present interest by giving the beneficiary a temporary right to withdraw the gift from the trust provided that several specific requirements are satisfied.

Also, payments of tuition or medical expenses that are made directly to the educational or healthcare provider are not taxable gifts, nor are they annual exclusion gifts. For example, if you pay the school directly for your godchild's tuition, or you pay the hospital directly for your friend’s surgery, you have not made a taxable gift, nor have you made an annual exclusion gift. However, if you give money to your godchild's parent or to your neighbor for them to use to pay those bills, then you have made a taxable gift.

Finally, a certain percentage of certain gifts to a qualified charity are non-taxable.

Is my life insurance policy taxable?

The beneficiaries of your life insurance policy will not pay income tax on the death benefits that they receive. However, if you own your life insurance policy or if you possess any “incidents of ownership” in the policy - e.g., the right to change beneficiaries or to borrow against the cash value of your policy - at the time of your death, the full face value of your policy will be included in your gross estate, from which your taxable estate is derived. Also, if you gifted your life insurance policy within 3 years of your date of death, the full face value of your policy will be included in your gross estate.

Is there a legitimate way to avoid including the value of my life insurance policy in my gross estate?

Yes. The key to avoiding inclusion of the death benefits of your life insurance policy in your gross estate is to establish or transfer the policy to another owner, ideally to an irrevocable life insurance trust (ILIT). However, there are a number of complex rules that must be followed in establishing and administering an ILIT. Also, transferring an existing life insurance policy to an ILIT must be done correctly to avoid inclusion in your gross estate.

The above information is provided for educational purposes only.  If you have any questions regarding estate and trust planning, estate and trust administration, probate, asset protection, or business entity formation, and how the laws in these areas may impact you and your family, please contact us at Paley Law at 323.654.9513 or

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