While gift and estate taxes are of primary concern in estate planning, there are two other taxes that also must be considered in the formulation of any estate plan. The first of these taxes is the generation-skipping transfer tax (GSTT). Like the gift and estate tax, the GSTT is a tax on the transfer of wealth. The GSTT can apply both to transfers during a person's lifetime and to transfers made by a person's estate after death. However, unlike the gift and estate tax, it applies only to transfers where the transferee is deemed to be two or more generations younger than the transferor. The GSTT substantially accomplishes the original goal of the gift and estate taxes: to tax the transfer of wealth at each generation.
The second tax considered in this module is more familiar to most people-the federal income tax. While many lifetime transfers of wealth are made with a primary motive of eventual estate tax savings, such transfers can also produce incidental income tax benefits. For example, an outright transfer of an incomeproducing asset will have the effect of transferring future income from the asset to the donee. In most circumstances, if the donee is in a lower marginal income tax bracket than the donor, less of this future income will be consumed by the income tax.
If non-income-producing property is transferred, income tax savings can also be achieved when the donee is in a lower marginal income tax bracket if the asset is a capital asset subject to the capital gains tax. When a disposition is made of the asset that triggers the tax, less capital gains tax will be paid.
Income tax benefits can also be achieved by not transferring capital assets during life. If such an asset was transferred as a result of the owner's death the recipient will have a basis in the asset equal to its value for estate tax purposes, rather than the owner's basis prior to death, which is almost always lower. Therefore, when the recipient sells the asset, there will be less capital gains tax to pay. Also, property known as income in respect of a decedent (IRD) is anything that would have been gross income to the decedent if it had been received prior to death, but that was not properly includible in computing the decedent's income for any taxable period prior to their death because it had not yet been received. IRD is discussed in greater detail in Chapter 2 of this module.
To accomplish a client's estate planning goals at the least cost, the estate planner must know how to avoid the GSTT to the extent possible. The planner must also know how to achieve the best balance of income tax savings for the client and their transferees in estate transfer transactions, consistent with the client's other goals. This module will provide the planner with such knowledge.
The material in this module provides an understanding of the generation-skipping transfer tax and the income tax consequences of estate transfer transactions. Such knowledge is necessary for the planner to be able to fully advise a client on all tax aspects of an estate transfer.
David Mannaioni, CFP®, MPASSM is a professor at the College for Financial Planning. Utilizing his 30+ years of experience in the financial services industry, David also maintains a financial planning practice where he works with his clients in all areas of financial planning. In addition to his certifications, David holds life and health insurance licenses in several states, as well as the Series 6, Series 7, and Series 63 registrations with FINRA. You can contact David at firstname.lastname@example.org.