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Tuesday, April 26, 2011

What “Unification” of Gift & Estate Tax Means to You

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When you hear that the estate tax is poised to take 35% of the taxable portion of your estate you may get to thinking about giving gifts to your loved ones while you are still alive.
This is a very logical approach, but the powers that be are well aware of the fact that people may be thinking along these lines. So as a response, there is a gift tax in place that carries the same 35% rate to discourage people from going this route.

Now you may have heard people say that there is a $5 million lifetime gift tax exemption that allows you to give gifts totaling up to this amount without incurring any tax liability. It is true that there is a $5 million gift tax exemption at this time as a result of the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (it used to be just $1 million for individuals). So you can indeed give gifts equaling as much as $5 million over your lifetime free of the gift tax.


However, the gift tax and the estate tax exemptions are unified. You don't get a $5 million estate tax exclusion in addition to the $5 million gift tax exemption for a total of $10 million. There is a $5 million combined estate/gift tax exemption. So, if you were to give gifts worth a total of $5 million over the course of your life using the gift tax exemption, all of your estate would be subject to the estate tax.

Of course this is a per-person exemption of $5 million. One of the provisions contained in this tax act that was passed at the end of last year allows for the portability of the combined estate/gift tax exemption. So now, when you pass away your surviving spouse may use your exemption as well as his or her own. Given this fact, married couples do have a $10 million cushion to utilize at the present time.

ABOUT THE AUTHOR: Alan L Augulis
Experienced estate planning attorneys of the Augulis Law Firm offer estate planning and business planning resources to residents of Warren, NJ.