Thursday, August 18, 2011

The $5 Million Exemption

On December 17, 2010, President Obama signed a bill raising the exemption from federal gift tax to $5 million.  As a married couple, each is entitled to such an exemption, bringing the total assets that a couple is able to transfer as a gift, tax-free, to up to $10 million.  Gifts beyond such exemption are subject to a federal tax up to 35%.  This new law is in effect for the year 2011 and 2012 and is set to expire at the end of 2012.  If Congress takes no action to extend or change the laws, the lifetime gift tax exemption will revert to $1 million and the top tax rate will go up to 55% beginning 2013.  The new bill unifies both the exemption from gift tax and estate tax for asset transfers to $5 million, once again befitting of the term "unified credit".

Individuals are entitled to an annual gift tax exclusion of $13,000.00.  For example, I can gift you, and each of your friends and family members, $13,000.00 free of gift tax.  Gifts over this amount in a given year to a particular person is subject to gift tax, unless an exemption is claimed against the donor's lifetime "unified credit".  Any unused amount of the "unified credit" remaining at the time of the donor's death can be used to exempt that same dollar amount of the donor's estate from federal estate taxes.  For example, Bob dies in the year 2011 with an estate valued at $3 million. Bob has a "unified credit" of $2 million remaining because he used a portion of his "unified credit" to exempt gift transfers of $3 million made during his lifetime.  Bob's taxable estate will be $1 million after applying the available "unified credit" remaining.

The "unified credit" has not been unified for many years.  In 2009, federal estate tax exemption was at $3.5 million while lifetime gift tax exemption remained at $1 million.  In 2008, federal estate tax exemption was at $2 million while lifetime gift tax exemption was at $1 million.  Lifetime gifts over $1 million were taxable. Top tax rate for both years was 45%.  Estate tax was repealed for estates of decedents dying in 2010.

Of course, the above is only concerned with federal gift and estate taxes.  One should always be mindful of applicable state laws.  Certain states, like New York, have estate taxes of their own with a top tax rate of 16%.  New York has no gift tax and has an estate tax exemption of $1 million.  Other states, such as Pennsylvania and Tennessee, levy inheritance taxes.  Yet still other states, such as New Jersey and Maryland, levy both estate and inheritance taxes in addition to federal estate taxes.  Texas and Florida, on the other hand, have no estate and inheritance taxes.

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