Legal Definitions - Unified estate and gift tax

The Unified estate and gift tax refers to a system in U.S. tax law where the taxes on gifts made during a person's lifetime and the taxes on their estate (assets transferred after death) are treated as a single, combined system. This means there is one total lifetime exemption amount that applies to both types of transfers. If you use part of this exemption to make gifts while alive, the remaining portion is available to reduce the taxable value of your estate when you pass away. Essentially, the law views lifetime gifts and transfers at death as part of a single continuum for tax purposes, applying the same tax rates and a single exclusion amount to prevent individuals from using separate exemptions to avoid taxes. This unified system was established by the 2010 Tax Relief Act, linking what were previously separate tax calculations.

Here are some examples to illustrate the concept:

• Example 1: Using the Exemption During Life
  Sarah wants to help her daughter purchase a home and makes a substantial cash gift of $5 million. At the time, the unified lifetime exclusion amount is $12 million. By making this gift, Sarah uses $5 million of her available lifetime exclusion. When Sarah passes away years later, her estate will only have the remaining $7 million ($12 million - $5 million) of the unified exclusion available to reduce its taxable value. This illustrates how the same single exclusion amount applies to both lifetime gifts and transfers at death, reducing the amount available for the estate.

• Example 2: Exemption Primarily for the Estate
  John lives a comfortable life but chooses not to make any significant taxable gifts to his children or grandchildren during his lifetime. Upon his death, his estate is valued at $15 million. If the unified lifetime exclusion amount at the time of his death is $12 million, his entire $12 million exclusion is available to reduce the taxable value of his estate. This shows how, if no part of the unified exclusion is used for lifetime gifts, the full amount is available to offset the value of the estate.

• Example 3: Strategic Planning with the Unified System
  Maria, a wealthy individual, consults with her estate planner about transferring assets to her grandchildren. Her planner explains that any large gifts she makes now will reduce the unified exclusion amount available for her estate later. Maria decides to make a series of gifts totaling $8 million over several years. Her planner meticulously tracks these gifts, informing her that she has now used $8 million of her unified lifetime exclusion. This demonstrates how individuals must plan strategically, understanding that every dollar of exclusion used for a gift during life directly impacts the amount available to shelter assets from estate tax upon death, highlighting the single, combined limit for both types of transfers.