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Wealth Transfer Taxes. Wealth transfer taxes are excise taxes on the privilege of transferring property from one person to another. Without detailing the onerously complicated details of the Internal Revenue Code, (wherein every discussion of which begins with "In general...", followed by "...however...", and then further conditioned by "...except in the case of..."), there are three primary areas of federal taxation which directly affect wealth transfers:

1.  gift (lifetime transfers),
2.  estate (transfers at death), and
3.  generation-skipping transfer taxation.

Additionally, the federal income taxation of individuals, trusts, corporations, and partnerships all indirectly, yet significantly, affect wealth transfer strategies and structures. Within these three primary areas, there are specific provisions underpinning five basic transfer strategies:

1. Annual Gift Tax Exclusion. Every person can give up to $12,000 per year as a gift to as many people as desired without incurring any gift tax. Married couples then can give up to $24,000 per year per individual. If only one spouse provides the funds, however, "gift-splitting" must be elected on their gift tax return. Thus, a married couple with two children and four grandchildren could give away $144,000 per year directly to these heirs (outright) or to a trust for their benefit (with additional complications, of course) without any gift tax consequences.

2. Qualified Education and Medical Payments. In addition to the Annual Gift Tax Exclusion, a gift tax exclusion exists for amounts paid on behalf of an individual directly to:

a. a qualifying educational organization as tuition for the education or training of an individual, or
b.any health care provider as payment for qualifying medical expenses arising from medical care with respect to that individual.

3. Unlimited Marital Deduction. A married person can give away any amount of property to his or her spouse free of any federal gift and estate tax during his or her lifetime, or at his or her death. The theory behind this tax code provision is that a husband and wife should be treated as a unit with shared marital wealth. Thus, that wealth should not be taxed when transferred within that unit; rather, transfer taxes should follow only when the property is transferred outside the unit to a third party or to younger generations.

At the surviving spouse's death, the property will be taxed in the surviving spouse's estate to the extent that he or she retained the property until death. Thus, this unlimited marital deduction does not permanently eliminate estate taxes, but it does postpone them until the surviving spouse dies.

4. Unified Credit. In addition to the unlimited marital deduction, each person is given a tax credit that protects up to $2 Million of assets from estate taxes. (Note: this exemption amount is presently scheduled to remain stable if death were to occur in 2007 or 2008, and increase to $3.5 Million in 2009.) During one’s lifetime, however, only taxable gifts up to $1 Million will be exempt from gift taxes; the estate and gift tax credit(s) is considered “unified” in that to the extent the gift tax exemption of $1 Million is used over one’s lifetime, it is applied against (deducted from) the estate tax exemption available at one’s death.

In a marital context however, if all assets were to pass to the surviving spouse, no transfer tax would be due because of the unlimited marital deduction, and the credit of the "first-to-die spouse" would be lost. Therefore, in order to avoid losing this credit, a married person should take steps to create sufficient gift and estate tax liability against which this credit can be applied. This is typically done through lifetime gifting in excess of the Annual Gift Tax Exclusion, or by way of a "Credit Shelter Trust" structure (also known as an A/B Trust, or Marital/Family Trust, arrangement).

5. Generation Skipping Transfer (GST) Tax Exemption. In general, each transfer subject to gift or estate tax that skips a generation (for example, a taxable gift from grandparent to grandchild), is subject to an additional tax at the top estate tax rate (46% in 2006, 45% in 2007-08). Each person, however, may exempt from this GST Tax an amount of assets equal to that exempt from estate taxes as described in paragraph 4 above ($2 Million in 2006-08). With careful planning then, a married couple can give, directly or indirectly, significant assets to their grandchildren without this added tax.