Originally published in the Orange County Business Journal, September 17-23, 2012.

It is difficult to miss the headlines, cocktail talk and political debates regarding taxes in an election year. By this time, most people who may be affected have heard that the estate and gift tax laws are scheduled to change for the worse in 2013. But what does that mean to the taxpayer? More importantly, how can you take advantage of current tax law before the “disappearing estate and gift tax exemption” – actually disappears? This article summarizes the estate and gift tax system and the available exemptions and suggests what you can do to take advantage of current transfer tax laws in 2012.

How do the estate tax and gift tax systems work?

Gift and estate taxes are Federal excise taxes imposed on the transfer of property (sometimes called “transfer taxes”). Briefly, gift taxes are imposed on “taxable gifts” made during life, and estate taxes are imposed on items included in a decedent's “taxable estate” at death. The gift and estate tax are unified under current law, meaning that these taxes are imposed on the cumulative amount of taxable transfers made by one person during life and at death. Gift and estate tax exemptions allow an individual to make a certain amount of taxable transfers free of transfer taxes by applying a tax credit to avoid paying tax. Much succession planning revolves around the reduction of a taxpayer's transfer tax liability by using gift tax exemptions during life or estate tax exemptions at death.