Estate, Gift, and GST Taxes

When it comes to taxes, people often think of the downside of parting with hard-earned cash. In reality, the tax bite that may occur on assets an individual owns on his/her death may be the hardest hit of all due to the fact estate taxes are assessed on property on which an individual has already paid tax during such individual's lifetime. Additionally, if an individual owns retirement plans upon which income taxes are payable on distributions such as traditional IRAs, Simple IRAs, non-Roth 401(k)s, and qualified annuities, then estate taxes are imposed on the income tax built into such assets which means your estate will pay estate taxes on income tax. Additionally, with gift taxes it is true it is less costly tax-wise to make a gift during your lifetime then after your death because a gift during your lifetime is tax exclusive while a gift after death (subject to estate tax) is tax inclusive. An example of the tax exclusive/tax inclusive impact is as follows: Assuming the gift/estate tax rate is a flat 50% and assume all transfers are subject to this 50% tax: (1) Tax Exclusive example - if you wish to make a gift of $100,000 during your lifetime you would need a total of $150,000 because of the $50,000 tax on the $100,000 gift ($100,000 x 50%); (2) Tax Inclusive example - if you wish to make this same gift after your death you would need a total of $200,000 because of the $100,000 tax on the $200,000 transfer ($200,000 x 50%). However, you should not go out and make a bunch of gifts during your lifetime because this issue is only part of the problem.