The purpose of the unified transfer tax credit is to offer a tax credit for gifts made to others either before or after your death. The unified tax credit offers exclusions on gift and estate taxes, typically up to $1 million. You are eligible for this tax credit, and it can be applied to large gifts made during your lifetime and gifts of valuable assets upon your death.
All federal tax credits lower your taxes. Although federal gift and estate taxes can reduce the value of the assets you transfer, including decreasing the value of your estate, the unified tax credit offers a lifetime exemption on your gifts while you're alive and the assets you transfer to your heirs after your death. If your gifts include future interests in some assets that may grow in value, such as investments or real estate, the unified transfer tax credit will help preserve the value of your gifts.
Gift Tax Exclusion
You can currently give gifts worth up to $13,000 per year to another and escape federal gift taxation. This is an annual, not a lifetime, exclusion, so you could give anyone -- not just a relative -- an annual gift valued up to $13,000 each year if you so desire, without tax consequences. The Internal Revenue Service also allows "gift-splitting." Married couples can gift up to $26,000 per year without tax consequences, as long as the gift tax return indicates that you and your spouse agreed to use the gift splitting feature of the tax law.
Gift Return Issues
To use the unified transfer tax credit properly, you might need to file a gift tax return. Should you give a gift to someone, other than your spouse, that is larger than the annual exclusion, or should you and your spouse split the gift, you normally must file a gift tax return. Gifts made to charities or to pay another person's medical or tuition expenses are exempt from gift tax return requirements.
Unified Tax Credit for Estate Taxes
Since the unified tax credit applies to both gift and estate taxes, you can choose to not use the unified credit for reducing gift taxes while you're alive, saving it for the gifts you make to your heirs. Because probate court can cost you between 5 and 7 percent of your estate value, you may want to safe this lifetime credit to save estate taxes. Your executor or beneficiaries must complete IRS Form 706 to take advantage of the unified transfer tax credit. With a basic estate tax exclusion of $5 million, your heirs may not need to take advantage of the unified tax credit after your demise.
UnifiedTax Credit Changes
Since the original Tax Reform Act of 1976, lifetime transfers of gifts or asset transfers upon death have fallen under unified transfer tax credit regulations. But Congress has changed the amount of this tax credit over time. For example, in 1977, this tax credit started at $6,000. By 2012, the unified tax credit limit was $1,772,800. Stay current with limits for this tax credit if you plan to use it.
- Thinkstock/Comstock/Getty Images