In the United States there is a federal estate tax, and there is a federal gift tax. The two taxes are said to be unified, and there is a $5.25 million unified exclusion or credit.
Because of this unified exclusion most people are not exposed to the federal estate tax. If your assets do not exceed $5.25 million in total value, the estate tax will not be a factor at the present time.
Due to the fact that the gift tax and the estate tax are unified you gain no tax advantages by giving gifts while you’re still alive using a portion of your unified exclusion. To explain by way of example, suppose your estate is worth $15.25 million. If you give away $5.25 million while you are living, it can be given tax-free.
However, the remaining $10 million would be subject to the estate tax after you die.
If you do not give the $5.25 million in gifts while you are living, your tax situation remains unchanged. The first $5.25 million will pass free of the estate tax. The remaining $10 million would be subject to the death tax and its 40 percent maximum rate.
You are not going to gain any tax efficiency by giving gifts using your Iowa unified tax exclusion if the parameters stay the same throughout your life on through to your death. However, what if the parameters were scheduled to change?
The White House has presented a proposed budget for 2014. It includes changes to the estate tax parameters that would go into effect in 2018.
Under this proposal, the maximum rate of the federal estate tax, the gift tax, and the generation-skipping transfer tax would go up to 45 percent. The estate tax exclusion would go down to $3.5 million. These were the parameters that were in place in 2009.
If this proposal was to be adopted, there would in fact be a reason to consider giving gifts while you are alive using your unified exclusion. This is because of the fact that the Iowa unified tax exclusion would be in excess of $5 million between now and 2018. You would have an extra $1.5 million or so to utilize before this change went into effect.
Annual Gift Tax Exclusion
While we are on the subject of tax-free gifting, we would be remiss if we did not mention the annual gift tax exclusion. This exclusion exists in addition to the unified exclusion. It allows you to give as much as $14,000 to any number of gift recipients every year free of the gift tax. To clarify, when you use this exclusion you are not using any of your unified exclusion.
Though the utilization of unified exclusion is not going to provide tax efficiency, you should certainly consider lifetime gifting using the annual per person exclusion if you are looking for ways to gain estate tax efficiency.