When you are looking for the best way to transfer assets to your loved ones you have to consider the obstacles, and one of these is the estate tax. Many people question the logic behind a tax that is imposed for the transgression of dying, so they reason that they can avoid it by simply giving away their assets while they’re still alive to those who would otherwise inherit them.
Unfortunately the powers that be are aware of the fact that people could give gifts in an effort to avoid the estate tax, so there is a gift tax in place. There is a lifetime gift tax exemption of $5 million at the present time, and the rate of the tax is 35% due to the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
That tax measure also mandated a $5 million exclusion and a 35% top rate for the estate tax. So when you combine these facts you may come away thinking that you have two separate $5 million exemptions; $5 million for gift giving while you’re still alive, and a $5 million estate tax exemption that can be utilized upon your passing. This would be nice, but it is not an accurate interpretation.
The fact is that the estate tax and the gift tax are said to be “unified,” and this means that any portion of your unified exemption that you utilize giving gifts will be deducted from your available estate tax exclusion. So for example, if you gave $2.5 million worth of gifts throughout your life utilizing the gift tax exemption, only $2.5 million would be left when you died. As a result only the first $2.5 million of your estate would pass to your heirs free of the estate tax.
One thing that is useful to keep in mind is the fact that this is a per-person exclusion. So if you are married you and your spouse would have a combined $10 million exclusion to work with.