Should I Use My Unified Exclusion While I’m Living?
There is a unified exclusion or credit that separates the people who are exposed to federal transfer taxes from those who are not. For the rest of 2014 the amount of this exclusion is $5.34 million. Because we still have some time left in this year we will use this figure throughout this post.
What Is Unification?
Before we get into the question of whether or not you should use your exclusion while you are living, let’s explain what unification is. There is a federal estate tax, and there is a federal gift tax. The two levies are unified.
The exclusion or credit that we mentioned above is all-encompassing. It is the amount that can be transferred while you are living and after you die before taxes would be applicable.
Simply put, if you gave away $5.34 million throughout your life using the unified exclusion, there would be nothing left to apply to your estate as it is being passed on to your heirs.
When Should You Use It?
The question of whether or not you should use this exclusion while you are living does not have a cut and dry answer. In a general sense, it’s the same outcome either way.
However, there is something to take into consideration. The amount of the exclusion is not set in stone. In fact, last year the White House proposed a budget for this year. It included changes to the estate tax parameters that would go into place in 2018.
This proposal would set back the clock and install the same exclusion and maximum rate that was in place in 2009. Back then the amount of the estate tax exclusion was $3.5 million, and the maximum rate was 45 percent.
Let’s say that this was actually passed and the unified exclusion was going down to $3.5 million in 2018. You would definitely want to consider using your unified exclusion to give gifts in the meantime when the exclusion is in excess of $5.34 million.
We would like to emphasize the fact that this scenario is not the reality as it stands. It is simply a proposal that is not going to be readily adopted by many on Capitol Hill.
Annual Gift Tax Exclusion
In closing we would like to add a relevant point. In addition to the lifetime unified exclusion, there is an annual per person gift tax exclusion. You can give as much as $14,000 to any number of others within a given calendar year free of the gift tax.
You would only be using a portion of your unified exclusion to give a gift to any one person that exceeds this amount within a calendar year.