Legal Definitions - unified estate-and-gift tax credit

The unified estate-and-gift tax credit is a single, combined tax benefit that allows individuals to transfer a certain amount of wealth, either through gifts made during their lifetime or through assets left to heirs after their death, without incurring federal gift or estate taxes. This credit is "unified" because any portion used to offset gift taxes during life reduces the amount available to offset estate taxes upon death. It effectively exempts a specific dollar value of assets from federal transfer taxes.

Here are some examples to illustrate how the unified estate-and-gift tax credit works:

• Example 1: Lifetime Gifting

  Sarah, a successful entrepreneur, decides to give her daughter $2 million to help her start a new business. At the time, the unified estate-and-gift tax credit exempts $13.61 million per individual from federal transfer taxes. Sarah uses $2 million of her available credit to cover this gift. This means she doesn't owe any federal gift tax on the transfer. However, her remaining unified credit available for future gifts or her estate at death is now reduced to $11.61 million.

• Example 2: Estate Planning at Death

  When David passes away, his total estate is valued at $10 million. He had never made any large taxable gifts during his lifetime. Because his estate's value is below the federal unified estate-and-gift tax credit exemption amount (e.g., $13.61 million), his estate can use the full credit to cover the entire value of his assets. As a result, his heirs do not have to pay any federal estate tax on the inheritance.

• Example 3: Combined Lifetime Gifts and Estate

  Years ago, Maria gave her son a $5 million gift, utilizing $5 million of her unified estate-and-gift tax credit at that time. When Maria later passes away, her remaining estate is valued at $10 million. Assuming the unified credit amount is $13.61 million, her estate only has $8.61 million of the credit remaining ($13.61 million original credit - $5 million used for the lifetime gift). This means that while $8.61 million of her estate will be covered by the remaining credit, the remaining $1.39 million ($10 million estate - $8.61 million credit) will be subject to federal estate tax. This demonstrates how the credit is "unified" and reduced by lifetime taxable gifts.