By law, individuals may give a certain amount in tax-free gifts during their lifetime. These gifts might include money, property, or stocks. The amount you can give tax free, is your lifetime exclusion, and once you exceed that amount you must pay taxes on the gifts you give.
At present, individuals can gift up to $15,000, to any number of people, in a single year without it being considered a taxable gift. Generally, the gift recipient does not have to report the gift and will owe no taxes. Gifts in excess of $15,000 however, must be reported on a gift tax return (IRS Form 709).
What is The Unified Tax Credit?
Individuals who gift large amounts while still living may be required to pay gift tax, and assets left to beneficiaries may be subject to estate tax. The unified tax credit has a set amount that an individual can gift during their lifetime before becoming subject to any gift or estate taxes. The unified tax credit is designed to decrease the tax bill of the individual or estate. It can be used by taxpayers before or after death, integrates both the gift and estate taxes into one tax system, is adjusted for inflation, and has no income limit.
The lifetime gift tax exclusion was expanded under the Tax Cuts and Jobs Act, and with an inflation adjustment in 2020 increased to $11.58 million for individuals and $23.16 million for a married couple. This means that the federal tax law applies the estate tax to any amount above $11.58 million for individuals and $23.16 million for married couples. The exclusion amount in 2021 increased to $11,700,000.
How Might the Biden Administration Affect the Unified Tax Credit?
The $11.7 million exception in 2021 is set to expire in 2025. After 2025, the exemption will revert to the $5.49 million exemption (adjusted for inflation). While Congress can vote to make the $11.7 million exception permanent, the Biden administration has pledged to drastically decrease the Unified Credit for Estate taxes from $11.7 million to $3.5 million, and the credit for gift taxes to $1 million.
What Steps Should You Take to Lock In The $11.7 Million Exemption?
The gift and estate tax exemptions typically enable wealth to be passed on from one generation to the next tax-free. Individuals who are concerned their wealth may surpass any future unified tax credit should consider additional estate planning strategies to lock in the $11.7 million exemption.
Estate Planning Strategies For Reducing Estate Taxes
There are many estate planning strategies that enable the transfer of wealth from one generation to the next while significantly reducing estate taxes. Trust funds can be powerful estate planning tools and can be used for a range of purposes. There are different types of trust for individual situations and how each work is dependent on the type of trust the grantor has created and the rules they have specified. The benefits of creating trusts include:
- Reducing estate taxes
- Reducing gift taxes
- Ensuring children and grandchildren under 18 will be beneficiaries of an estate.
- Safeguarding the financial future of family members with special needs
- Protecting assets from lawsuits
- Protecting assets from creditors
If you have questions regarding the unified tax credit, trusts, or potential steps you might consider taking advantage of the unified tax credit before it is reduced, please reach out to our office at (914) 228-7448.