Financial News & TipsL’Observateur / September 22, 1999The more money you have, the more difficult it may be to pass that wealth on to your heirs. The IRS will use the estate tax, gift tax, and generationskipping transfer tax to extract a heavy share of the money you intend to use to care for your children and grandchildren. The following are possiblesolutions to the tax problems you may encounter in transferring money between generations.

Published 12:00 am Wednesday, September 29, 1999

Estate And Gift Taxes In one sense, these two are the same tax. If you transfer money whileyou’re living, a gift tax may apply. An estate tax may apply if you make thetransfer in your will. As taxpayers, we each have one “unified” estate -and gift-tax credit that shelters from tax a specified amount of transfers made during life or at death.

(The unified credit exclusion amount is to rise in steps from $650,000 in 1999 to $1 million in 2006 and beyond.) In addition, each of us may give upto $10,000 annually to each of any number of individuals without using any of our unified credit. If a spouse joins in gift-giving, the annual limitdoubles to $20,000.

Assets may be subject to estate taxes on the death of the owner. So, afamily strategy for reducing estate taxes may be to transfer your assets directly to your grandchildren in order to reduce estate taxes for your children. This type of transfer, however, is not always tax-effective. Thegeneration skipping transfer tax (GST) may make it too expensive. The GSTapplies to qualifying transfers in addition to gift and estate taxes.

You are allowed to make generation-skipping transfers of up to $1,010,000 free of the GST in 1999. The exclusion doubles to $2,020,000if you and your spouse “split” the transfers. There is one significantexception to the GST rule: If your child is not living, there’s no GST when you make a gift to your grandchild.

The identity of the person who is responsible for paying the GST depends on who does the transferring. If you transfer your assets to a grandchildand your child is still living, either you or your estate is responsible for the GST. If you use a trust to transfer assets to your grandchild, however,either your trust or your grandchild must pay the GST, depending upon the situation.

To Reduce The GST Consider the following if you plan to make transfers to your grandchildren that are large enough to be affected by the GST: Pay your grandchild’s tuition or medical expenses. If you pay theseexpenses directly to the school or medical provider, all payments are exempt from both the GST and gift tax.

Transfer property that is growing in value. This is a way to escape gift,estate, and generation skipping transfer tax on the appreciation because any increase in value after you make the transfer is exempt from all three taxes.

Use the gift-tax annual exclusion and the $1,010,000 GST exemption to your advantage. Give the maximum $10,000 gift to each of your children,grandchildren, or other heirs each year ($20,000 with your spouse). Over anumber of years, you will be able to transfer a substantial amount of your assets free of tax. You can divide your generation skipping transfersamong as many individuals as you want – while remaining within your total $1,010,000 exemption.

If you are fortunate enough to have significant wealth to transfer to future generations, consult a professional to make sure you avoid unnecessary tax.

(Alan S. Moore is a financial advisor of Legg Mason Wood Walker, Inc., adiversified investment brokerage and financial services firm in New Orleans.)

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