Federal Unified Transfer Tax Exclusion: Should You Use It During Your Lifetime?

Most people have heard of the federal estate tax, but there is also a federal gift tax. These two taxes on asset transfers are said to be unified by the Internal Revenue Service.

What does this Oklahoma unified transfer tax exclusion entail? For one thing, the estate tax exclusion is unified with the gift tax exclusion. The total exclusion for 2013 is $5.25 million. You can transfer this amount during your lifetime or upon your death free of any transfer taxes. Anything you give above this amount is potentially subject to the gift tax or the estate tax.

Because of the unification both taxes carry the same rate. The maximum rate in 2013 is 40 percent. It should be noted that this percentage also applies to the generation skipping transfer tax.

Giving Gifts During Your Life

If it wasn’t for the existence of the federal gift tax, making extensive gifts during your lifetime would make sense, because they would be tax-free. In fact, there was no gift tax for a few years after the estate tax was enacted. However, wealthy families such as the Rockefellers took advantage of this loophole, and a gift tax was added.

Generally speaking, the advantages of making lifetime gifts that absorb your lifetime exclusion are limited because you are reducing the amount of your exclusion available to the value of your estate.

However, there is a caveat to the above. Right now, the unified exclusion is $5.25 million. If you knew that the exclusion was going to be reduced in the future, you should consider making gifts during your lifetime that absorb your unified exclusion. In doing so, you can utilize that portion of your unified exclusion that would eventually be lost if not absorbed.

This is not just a purely hypothetical thought. It is actually quite relevant right now in real life.

The budget that has been presented by the president for 2014 includes a reduction in the amount of the federal estate tax exclusion (to begin in 2018). Under this proposal, the exclusion would go down to $3.5 million. And, the rate would go up to 45 percent.

If this proposal was to be adopted as law people who are exposed to the estate tax would certainly do well to consider the possibility of giving gifts before this reduction in the unified exclusion was to become active.

Annual Gift Tax Exclusion

Another thing to understand when you are trying to make sense of lifetime gifting is the fact that there is an annual gift tax exclusion that exists apart from the Federal unified transfer tax exclusion. You can give gifts totaling as much as $14,000 to an unlimited number of recipients each calendar year free of the gift tax.

These gifts would not reduce the amount of your available unified gift/estate tax exclusion.

Blaine Peterson
Author, Attorney
Parman & Easterday