Estate Planning Law

How Does the Unified Credit Work for My Estate Taxes?

When you give money or assets to someone, the federal government may be able to tax those gifts. By understanding gift and estate taxation, and the unified credit, you can eliminate or minimize the amount of taxes you pay on your bequests.

That’s what we’re going to explain in this article. We at Doane & Doane strive to help our clients understand the law to their benefit and that of their friends and family.

After you’ve read this article, if you have any questions about your own gifting plans and the unified credit, you’re welcome to contact the Palm Beach County lawyers at Doane & Doane, PA. Give us a call at (561) 656-0200 or contact us here.

Gift and Estate Taxes

When you give someone a gift, whether while living or upon death, it may be subject to federal taxation. However, there are exclusions, exemptions, and unified credit – all of which can result in the elimination or reduction of taxes owed.

1. Gift Tax Exclusion

Under current law, when you give another person a gift, the first $15,000 is excluded from taxation. In other words, you may give someone a gift of up to $15,000 without the recipient having to pay federal taxes.

2. Gift and Estate Tax Exemptions – The Unified Credit

Then, there is the exemption for gifts and estate taxes. A person giving the gifts has a lifetime exemption from paying taxes on those gifts until they reach a certain figure. For 2021, that lifetime exemption amount is $11.7 million. This is called the “unified credit.” After the unified credit limit is reached, the donor pays up to 40 percent on that exceeding the unified credit.

The clear trend in the past 20 years has been to increase the exemption and decrease the tax rate. The following table shows the trend:

Year Exemption Amount Maximum Tax Rate
2000 $0.675 million 55%
2005 $1 million 47%
2011 $5 million 35%
2020 $11.58 million 40%
2021 $11.7 million 40%

Currently, the exemption is tied to inflation, so it rises slightly each year.  However, one thing to understand is that unless the law is changed, the exemption reverts to $5.49 million after 2025.

Here’s an example of how the unified credit exemption works. Assume your wealthy aunt passes away. At the time of her death, she had made no gifts, so her exemption amount is $11.7 million. Your aunt leaves $20 million to her brother. The amount subject to the estate tax will be $20 million – $11.7 million = $8.3 million. 

Most people don’t have millions of dollars at death to give to others. Estate taxation becomes an issue when the donor has significant assets.

Methods of Gifting to Eliminate or Minimize Gift and Estate Taxation

There are several legal strategies available.

1. Gifting Your Assets Now

Many people think they should wait until death before distributing their assets to others. But a donation now, while you’re still alive, has many benefits. First, you can enjoy watching your loved ones benefit from your generosity. Second, gifting now can reduce the taxation of your estate.

Say you had $11.7 million that you wanted to transfer to your cousins. If you gave it to them today, they could invest the money. Assuming a growth rate of six percent over five years, that would be $15.7 million that your cousins received without you owing any gift taxes. 

Alternatively, if you had invested it yourself, and then in five years, you would have $15.7 million. 

At that time, you still decide to give your money (all $15.7 million) to your cousins. One of two things is going to happen. Either the unified credit will be $11.7 million-plus the amount it increases due to inflation. For this example, we’ll assume that the unified credit adjusted for inflation would be $13 million. 

Or, due to lack of congressional action, the unified credit will have reverted to $5.49 million. You will either owe gift taxes on $13 million – $11.7 million = $1.3 million, or on $13 million – $5.49 million = $7.51 million. In either case, you have a hefty tax bill.

So, it may make sense to distribute some of your wealth now.

Another way to give money tax-free is to take advantage of exceptions to gift and estate taxation. One of these is the ability to make unlimited payments to educational institutions or healthcare providers. For example, if your cousin goes to law school, you could pay their tuition directly to the law school without incurring gift tax liability or reducing the amount of your unified credit.

2. Gifting Your Assets Upon Death – The Irrevocable Trust

An irrevocable trust is formed by a settlor (the person giving the gifts), a trustee, and beneficiaries. The settlor cannot unilaterally revoke or amend it or take back assets they placed in the trust. Nor may they remove or change beneficiaries. Irrevocable trusts can be an effective way to minimize estate taxes because they essentially remove them from the settlor’s estate.

Eliminate or Reduce Your Gift and Estate Taxes with Doane & Doane

Husband and wife team Randell C. Doane and Rebecca G. Doane formed Doane & Doane in 2003. Their firm provides legal and financial services to clients throughout Southeast Florida.

They believe that estate planning encompasses much more than just distributing property – it’s an act of love and kindness to provide a secure financial future for your loved ones. At Doane & Doane, our tax and estate professionals help people plan for retirement, prepare wills and trusts, provide for loved ones, and reduce tax liability. 

From the first day we began business, we’ve worked tirelessly to earn a reputation as one of the region’s premier tax and estate planning law firms in Palm Beach County, Florida. Our outstanding team includes our founding partners, dedicated associate attorneys, and a hardworking team of paralegals, legal assistants, and support staff.

Call the Palm Beach County lawyers at Doane & Doane, P.A. You can reach us at (561) 656-0200 or use our contact form here.

The information in this blog post is provided for informational purposes only and is not intended to be legal advice. You should not make a decision whether or not to contact an attorney based upon the information in this blog post. No attorney-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.