How Does “Unified” Estate and Gift Tax Work?

One of the most potent sources of asset erosion out there is the estate tax, and doing what is possible to reduce your estate tax exposure is a large part of what estate planning is all about. Of course only some people are asked pay the estate tax, and the dividing line that separates those who must pay from those who do not have to pay the tax is the estate tax exclusion amount. As a result of the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 that was passed late last year the estate tax exclusion right now is $5 million. This means that the portion of your estate that exceeds $5 million in value is subject to a 35% federal levy.

A lesser publicized change that was included in the new tax act that affects estate planning involves the gift tax. Prior to the passage of this measure the lifetime gift tax exemption was $1 million. It has now been brought into line with the estate tax and the gift tax exemption is now $5 million and the rate of the tax is now 35%.

When you digest these facts you may assume that there are two different exemptions that you can utilize; $5 million to give gifts while you are still alive, and a $5 million exemption that can be used once you pass away. Unfortunately this is not the way it works. The estate tax and the gift tax are said to be “unified,” and this means that your estate tax exclusion will be reduced by any gifts that you give throughout your life using the gift tax exemption. So if for example you gave $2 million in gifts tax-free utilizing the lifetime exemption during your life, when you pass away only the first $3 million of your estate could be passed on to your heirs free of the estate tax.

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Saul Kobrick

Saul Kobrick is an attorney licensed to practice law in the State of New York and the Founding Partner of The Law Offices of Kobrick & Moccia. Mr. Kobrick is licensed to practice law in all courts of New York State, as well as in the Federal District Courts for the Southern and Eastern Districts of New York. He is a member of the New York State, and Nassau County Bar Associations as well as a member of the American Academy Estate Planning Attorneys. Mr. Kobrick is also a member of the National Academy of Elder Law Attorneys.

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