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By Anna Melissa Price of Jenkins Fenstermaker, PLLC on 01/13/2021
How the Unified Tax Credit Maximizes Wealth Transfer

Effective estate tax planning can preserve wealth for future generations and charitable giving. After working hard to grow and maintain your assets, estate planning is the key to preserving the fruits of your efforts. Many in West Virginia (WV), Kentucky (KY), and Ohio (OH)—as elsewhere in the nation—include lifetime giving as one of the ways to reduce estate taxes. The unified tax credit helps safeguard your wealth by creating tax benefits tied to both your lifetime giving and the rest of your estate plan.

The unified credit offers many benefits when used strategically, but it appears to be temporary. The unified tax credit became available to taxpayers in 2009, but the legislation creating this benefit included a sunset date. As with any legislatively created benefit, new legislation could extend—or revoke—this option. Whether you’re creating your first estate plan or updating an existing one, understanding the unified credit is critical to its effective use and the success of charitable giving, wealth preservation, and wealth transfer endeavors.

Understanding How (and When) the Unified Tax Credit Works

You’ve spent a lifetime creating, growing, and protecting your estate. Identifying and employing strategies to minimize tax exposure is a natural part of that. The unified tax credit allows you to develop a comprehensive plan involving lifetime and after death wealth transfers to minimize the exposure to federal estate taxes.

However, the legislation giving life to the unified tax credit in 2021 is on a short lease. With a sunset date looming and the complexities of the federal tax code, incorporating the unified credit into your overall estate plan requires a thorough understanding of its benefits and limitations in the fabric of the overall tax code. Your best bet is navigating this landscape under the guidance of a knowledgeable and experienced estate tax attorney.

What Is the Unified Credit?

Under the Internal Revenue Code, high-value asset transfers are subject to tax—gift tax if made during the transferor’s lifetime or estate tax if made after the transferor’s death. The unified tax credit is the result of combining the lifetime and after-death tax provisions to allow individuals to allocate transfers between them to implement their estate planning goals more efficiently. Specifically, it sets parameters under which an individual may avoid gift tax, estate tax, or generation-skipping tax incident to wealth transfers.

By way of example, assume a married individual has a $10 million estate. As of December 2020, the federal tax code imposes gift tax only on wealth transfers in excess of $11,580,000 over the course of the individual transferor’s lifetime. The unified credit allows the individual to count both lifetime and after-death transfers against this total. The individual may gift the entire estate while living, after death, or both, without incurring any gift, estate, or generation-skipping tax on the transactions.

However, an individual with a $20 million estate is not similarly situated. That individual may transfer—during life or after death—up to $11,580,000 without exposing those transfers to gift, estate, or generation-skipping tax. While that still leaves more than $8 million subject to tax, absent the use of other estate planning strategies, the savings is significant given a 40 percent estate tax rate and a gift tax rate that can be just as high.

The History of the Unified Tax Credit

Legislation creating estate tax hails back to the early 20th century, but the legislation uniting estate and gift taxes, the Tax Reform Act (TRA) of 1976, came much later. Before the passage of the TRA, lifetime gifting allowed taxpayers to protect more of their estate from taxes than passing assets at death. The TRA allowed taxpayers to marry the two tax systems, allowing taxpayers greater leeway in choosing when to transfer assets without worrying about taxes based on the timing of the transfer.

From 2011 to 2018, the lifetime exemption from gift and estate tax had grown to $5 million per person and double that for married couples. Effective 2018, the Tax Cuts and Jobs Act (TCJA) doubled the basic exclusion amount again which, adjusted for inflation, made the exemption $11.2 million per person or $22.4 million per couple. With adjustments for inflation, the maximum transfers allowed free of gift or estate tax increase each year, and the tax rate on transfer amounts in excess is capped at 40 percent.

But these TCJA provisions are short-term. As a sunset law, its benefits are available only for transfers made between 2018 and 2025. Unless Congress expressly modifies its termination, the benefits conferred are no longer available after 2025.

Threats to the Unified Tax Credit before Its Sunset Date

The tax benefit end date in the TCJA may not be the final word. Future legislation could either extend that date, change the terms of this benefit, or make it permanent.

The Biden administration has floated tax plans that include lowering the gift and estate tax exemption amount back to 2009 levels of around $3.5 million. The impact on wealth transfer—and preservation—would be significant.

Federal gift and estate taxes have changed numerous times since 2000. Congress sees competing battles between calls to repeal gift and estate taxes altogether, switch to an inheritance tax, or revert to a prior gift and/or estate tax scheme.

The close balance in the legislative branch would make major change an uphill battle, so there’s no guarantee about what will happen there regarding the current gift and estate tax legislation.

Wealth Transfer Strategies in WV, KY, and OH

Without a crystal ball, there’s no way to predict what will happen to the generous gift and estate tax benefits gained through the unified credit. As a result, serious planning with an experienced estate tax attorney is vital from the start and regularly thereafter to make adjustments necessitated by legislative changes.

The uncertain future of the unified tax credit is a perfect example of the need for diligent attention to these matters. To protect your wealth and your plans for its future, call estate tax attorney Anna M. Price at Jenkins Fenstermaker, PLLC. By dedicating her practice to complex estate planning and administration, Anna helps clients throughout WV, KY, and OH leave a legacy confident that their wishes, wealth, and estate plans are honored. To learn more about how Anna can help with your estate plan, schedule a consultation by calling (304) 523-2100 or complete this online contact form.