Estate Planning Conundrums Worth Repeating

Gallo, Jon J.
August 2005
Journal of Financial Planning;Aug2005, Vol. 18 Issue 9, p30
Academic Journal
This article examines some fundamental concepts of estate planning that financial planners in the U.S. should be able to explain to clients. Gift taxes are cheaper than estate taxes. Once property has been acquired, one is faced with the estate and gift tax system. Even though the estate and gift tax rates are identical, more wealth can be transferred by a lifetime gift than at death because the effective tax rate applicable to transfers at death is higher than the effective tax rate applicable to lifetime gifts. This difference in effective rates occurs because the estate tax is tax inclusive, while the gift tax is tax exclusive. Virtually all estate planning techniques that save transfer taxes are based on lifetime transfers. The marital deduction merely defers estate taxes; it does not save taxes. The gift tax is imposed on the value of the property received by the donce, while the estate tax is imposed on the value of the property in the transferor's estate. Valuation adjustments reflect the reduced value of gifts that lack control or marketability. Time value of money also can reduce the value of property transferred during lifetime. Explaining these concepts to clients at the start of the estate planning process facilitates their willingness to explore and employ useful but complex estate planning techniques.


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