2015 Unified Credit and Annual Gift Tax Limits Raised

The IRS recently released the 2015 tax year exclusion amounts for the unified credit (or basic exclusion) and the annual gift tax exclusion.

For the 2015 tax year, the unified credit exclusion is $5.43 million per taxpayer.  The annual gift tax exclusion remains at $14,000.

The unified credit is the combination of the lifetime gift tax exclusion and estate tax exclusion.  If your lifetime gifts and taxable estate exceed $5.43 million in 2015, you will then owe up to 40% tax to the federal government.

A good overview of the implications of the unified credit and annual gift tax exclusion is here.

Updates on federal estate and gift tax issues

This post is long overdue but, as we know, there has been a lot of activity in the past few months for farmers and ranchers.  But now that we have a Farm Bill, it is time to look at what 2014 holds for federal estate and gift tax issues.

First, the annual gift tax exclusion:

We’ve previously discussed the annual gift tax exclusion.  For 2014, the annual gift tax exclusion remains $14,000.  What this means is that an individual can gift up to $14,000 per year to as many individuals as you’d like without tax implications.    In other words, you can gift up to $14,000 per year to each of your children, each of your grandchildren, or any other individual you’d like.

Second, the unified credit:

There is another gift tax issue beside the annual gift tax exclusion — for gifts over $14,000 to an individual in a year.  This is the estate and gift tax, or more commonly known as the unified credit.  For 2014, the estate and gift tax exclusion is $5.34 million.

But what does that mean?  It means an individual can gift up to $5.34 million dollars before any gift tax will be assessed.  It also means an individual can transfer $5.34 million at death before any estate tax will be assessed.  It also means that the gift tax and estate tax are unified, meaning an individual can only gift or transfer $5.34 million before the tax is assessed.  In other words, an individual can gift $2 million and transfer $3.34 million and no tax will be assessed.  Alternatively, if an individual gifts $3 million and transfers $3.34 million, tax will be assessed on $1 million ($3 million + $3.34 million – $5.34 million = $1 million).

Even if your assets and/or net worth does not approach $5.34 million (or $10.68 million if married), estate planning is well worth your time.  You will still want to consider who will inherit your assets, how you want those assets inherited (e.g. will, trust, shares of a business), and, if you have minor children, guardianship.  You will also want to consider the costs of probate versus the costs of trusts, powers of attorney and health care, and end-of-life care.

Estate planning is for everyone, not just those who may have assets that go above the federal estate and gift tax exemption of $5.34 million.  It is worth the time to consider what you need and want and then take the necessary steps to ensure those needs and wants can and will occur.

Some basics about the federal estate and gift tax

As discussed previously, the 2014 unified credit for federal estate and gift tax has been raised to $5.34 million per person.  But what does that all mean?

The unified credit is the term given to the total amount a person may exclude from federal estate and gift tax.  In other words, a person may transfer assets during their lifetime (i.e. gifts) or after (i.e. estates).  The amount a person may transfer via only gifts, only estates, or a combination of the two is the unified credit.  It is only when the credit is exceeded that federal estate and gift tax is owed.  In other words, if the combination of your gifts and estate totals $6.34 million, federal estate and gift tax will be owed on $1 million ($6.34 million minus $5.34 million 2014 unified credit).

Portability remains a possibility with spouses.  Remember that portability requires the estate of the deceased spouse to file an estate tax return, even if no tax is owed.  The estate tax return is due nine months after the death, with a six month extension permitted.

Also remember that the annual gift tax exclusion is different than the unified credit.  You can gift up to $14,000 per person without encroaching upon the unified credit.

A good article that goes over the above and a few other details is here.  If you are a Nebraska or South Dakota farmer or rancher considering business transition, feel free to contact us with any questions you may have about the federal estate and gift tax.