Federal Estate and Gift Taxation

South Dakota's citizens repealed the state inheritance tax effective July 1, 2001 by amending the South Dakota Constitution. However, there remains other death taxes that can attach to a person's estate -- the federal estate tax, generation skipping transfer tax, and even the federal income tax.

The federal estate tax allows a unified credit (also known as the applicable exclusion amount) for every person. The unified credit is the amount that the federal government will allow each person to pass to the next generation during life or at death before any federal transfer taxes are owed.

The unified credit is $1 million in 2003. In 2004, it is scheduled to increase to $1.5 million; in 2006, to $2 million and in 2009, $3.5 million. In 2010, as the law currently reads, there will be no estate tax (although there remains a gift tax) but in 2011, the estate tax returns and the unified credit shrinks back to $1million.

The federal estate tax is based upon the fair market value of a person's estate at date of death. It includes all property interests including life insurance proceeds, tax-free bonds and retirement benefits. If a person's or couple's estate approach the unified credit amount, there are ways in which GPNA can reduce the federal estate tax the heirs would otherwise pay. This is important to consider as the federal estate tax rates are quite steep.

There is also a federal gift tax. This tax is designed to prevent individuals from transferring property in an attempt to avoid federal estate taxes. Thus, if a person makes lifetime gifts more than the allowable credit, a gift tax will be triggered. There is an annual gift tax exemption of $11,000 which allows persons to make gifts of this amount to others without reducing the unified credit or triggering any gift tax.

The generation-skipping transfer tax is a federal transfer tax that is separate from the gift and estate taxes. Generally, it applies to a transfer of property to a grandchild (a transfer which skips a generation). It also applies to a transfer in trust for a child's lifetime with the property being distributed to grandchildren upon the child's death. Each person may transfer up to $1 million without the tax being imposed.

For certain assets such as IRAs, there may also be income tax due by virtue of an account holder's death.