their wealth. 3.   Gift tax is applied to gifts made to heirs and other noncharitable beneficiaries by a living donor. The tax rate is graduated but quickly reaches 55 percent. There is a lifetime exemption that is currently $1,000,000 per donor. This is scheduled to rise to $3,500,000 by 2009. A husband and wife can be considered separate donors, thus doubling the amount of wealth that could be passed to children free of transfer tax. In addition to this lifetime exemption, individuals may give up to $11,000 per year to an unlimited number of recipients. This will not count against their lifetime exemptions. Thus, a husband and wife could each give up to $11,000 per year to each child and grandchild. The annual allowance plus the lifetime exemption are sufficient to allow most Americans to avoid paying pay gift or estate taxes. 4.   Estate tax is similar to and intertwined with the gift tax. Gift and estate taxes are sometimes referred to as transfer taxes. Estate taxes are applied to bequests to noncharitable recipients from the estate of a deceased person. There is a lifetime exemption, which is the same exemption applied to the gift tax. Any usage of this exemption to avoid tax on gifts reduces the exemption left to apply to the estate tax. There are two important distinctions between the gift and estate taxes.   (1)   Appreciated assets given by a living donor will retain their cost basis. Thus, the recipient will have a contingent tax liability on such assets and will be liable for capital gains taxes if the assets are sold at a price greater than the original cost basis. Conversely, appreciated assets in the estate of a deceased person receive a step-up in basis. The cost basis of the assets is increased to the market value at the time of the donor's death. This wipes out capital gains tax liability on appreciated assets. (2)   Estate tax is calculated on a tax-inclusive basis (i.e., the tax is applied to the entire amount of the estate including the portion that will be used to pay the tax). Table 29.1 illustrates this point. There is a clear tax advantage to giving wealth to children sooner, by gift, rather than later by bequest. This can create tensions within a family, sometimes with cruel consequences. This is a very brief summary of the key elements of the tax code affecting investors as of August 2002. The federal tax code is extremely complex with over 40,000 pages. It is safe to say that 250 million Americans are subject to a tax code than no human being can fully understand! The tax code is constantly being revised. The complexity is a function of the various objectives pursued by the legislators who write the tax code. These include raising revenue, encouraging and discouraging certain activities and targeting redistribution of wealth. The complexity of the tax code seems to accumulate much like barnacles on a ship. It appears the legislators care little about the administrative burden that their unnecessarily complex tax code imposes upon individuals and businesses. This is unfortunate because the enormous aggregate cost of compliance is a squandering of society's resources on an unproductive activity. Transfer taxes are in an unusual state of flux. They are currently scheduled to gradually decline for nine more years, then go to zero for one year, then revert back