What is the unified estate and gift tax credit and how does it reduce my gift taxes?
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UPDATED: Dec 13, 2019
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The unified gift and estate tax credit is the current shelter amount for gifting during ones lifetime and at one’s death. When an estate is below the unified gift and estate tax credit limit, there will be no estate tax due at the time of death. Instead, all of those funds pass directly to the specified recipients.
History of the Unified Gift and Estate Tax Credit
The unified credit legislation began in 1976. During this time, someone could give away up to $30,000 per year and $60,000 upon death. This number was combined in 1977 to form the unified gift and estate tax credit. The amount of this credit increased and plateaued through the years until the Bush administration, when it increased yearly and estate tax was abolished in 2010.
Understanding the Gift Tax Credit and Legal Shelters
The IRS places restrictions on gifts given to people other than your spouse. If a gift is given as a present interest gift, meaning it is given outright to a person, then the amount is not added into your total lifetime unified gift and estate tax credit. Instead, these gifts are limited to $15,000 per person annually. When a gift is given with a future interest, meaning the gift cannot be used until your death, it is included in your unified gift and estate tax credit. The most common example of this occurrence is in irrevocable trusts.
The IRS has provided some legal shelters for those desiring to gift more during their lifetime. If the gift is given directly to an educational institution or medical institution, then the amount is unlimited. So, if you decide to pay for your grandson’s college tuition, the gift is unlimited so long as the check is written directly to the school. For those desiring to create irrevocable trusts and avoid the gift tax restrictions, estate planning lawyers can draft what are known as Crummey trusts.
When Does the Unified Gift and Estate Tax Credit Come into Play?
The primary time that the unified gift and estate tax credit comes into play is upon one’s death. For most middle class American families, their estate will always fall under the unified credit amount. The means that their families will not be required to pay any death taxes. However, for those families over the credit amount, estate taxes will be due at very high rates.
For those who gave future interest gifts during their lifetime, the gift amounts must be subtracted from the unified gift and estate tax credit amount and this new amount used when evaluating the estate. For example, if you gave $2 million in future interest gifts through revocable trusts during your life and you die in 2019, then your estate tax credit is reduced from $11.4 million to $9.4 million because of your lifetime gifts. (The Tax Cuts and Jobs Act of 2017 doubled the exclusion amount from $5,000,000 to $10,000,000, before adjusting the figures for annual costs of living increases. Starting in 2026, the exclusion amount will revert to 2017 levels, adjusted for inflation.)
Gift and estate tax law is very complex, and trying to create ways around it or seek out tax shelters is equally difficult. Both instances require precision in document drafting. If you have any questions about the unified gift and estate tax credit or are interested in tax shelters, contact an estate planning attorney.