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A Look At Federal Transfer Taxes, the Exclusions, and How You Can Put Your Available Exclusions to the Best Possible Uses

Should I Use My Unified Exclusion During My Lifetime?

PAUL A. KRAFT Indiana Estate Planning Attorney

Should I Use My Unified Exclusion During My Lifetime?


You invariably employed business strategies to obtain success. Subsequently, you must employ wealth preservation strategies to keep what you have earned intact for the benefit of your loved ones. Tax efficiency will be a factor. Let's look at federal transfer taxes, the exclusions, and how you can put your available exclusions to the best possible uses.

FEDERAL ESTATE TAX There is a federal estate tax that carries a 40 percent maximum rate. Clearly, this is very significant, especially when you consider the fact that you paid taxes along the way as you were accumulating wealth. Yet another tax is imposed upon the event of your passing. This is why the tax is often referred to as the “death tax.� While many people feel as though this is an instance of double taxation that is not fair, it is a fact of life nonetheless. The estate tax is not a factor for everyone, because there is a credit or exclusion. In 2014 the amount of this exclusion is $5.34 million. In 2013 it was $5.25 million. A base of $5 million was put into place for the 2011 calendar year, and it is adjusted annually to account for inflation under currently existing laws.

Should I Use My Unified Exclusion During My Lifetime?


Anything that you want to transfer to your loved ones that exceeds the amount of the exclusion is potentially taxable.

FEDERAL GIFT TAX In addition to the federal estate tax, there is a federal gift tax. The exclusion that we touched upon in the previous section is a unified exclusion. It does not apply exclusively to the estate that you are passing on to your loved ones. It also applies to taxable gifts that you give while you are living. Using the 2014 exclusion figure, if you give $5.34 million in tax-free gifts while you are living through the use of this exclusion, nothing would be left to apply to your estate. It should be noted that there is an annual per person gift tax exclusion that sits apart from the unified federal gift/estate tax exclusion. You can give gifts up to a certain amount to an unlimited number of gift recipients during a given calendar year free of the gift tax. The amount of these gifts would not be deducted from your available unified exclusion.

Should I Use My Unified Exclusion During My Lifetime?


At the present time the amount of this exclusion is $14,000 per person. As a result, if you are married you and your spouse each have $14,000 per recipient to utilize each year. To provide an example of how this could have an impact, as a couple you and your spouse could give $28,000 to your son, and $28,000 to his spouse. Let's say that you have three children, and all of them are married. You could transfer $56,000 to each family each year tax-free. Clearly, this can be a useful strategy if you want to give inheritances in advance as it were to gain estate tax efficiency. These gifts do not have to be given directly to the recipients right away. You could use this exclusion to distribute shares in a family limited partnership. The annual exclusion can also be used to facilitate tax-free funding of certain types of irrevocable trusts for the benefit of your children or any other heir.

SHOULD YOU GIVE AWAY MONEY WHILE YOU ARE LIVING? Getting back to the original premise of this paper, there is no real value in using your unified exclusion to give gifts while you are living if you are looking for transfer tax efficiency. As you are using your unified credit giving gifts, you are reducing the amount of the tax-free bequests that you could leave behind.

Should I Use My Unified Exclusion During My Lifetime?


However, the annual gift tax exclusion is a different matter. You would definitely want to consider using this exclusion when you are planning your estate if your assets exceed the amount of the unified exclusion. We would like to add a caveat with regard to the utilization of a portion of your unified exclusion while you are living. Doing this will provide no real value assuming the exclusion remains the same throughout your life on to the time of your death. If you were aware of the fact that the unified exclusion was going to be reduced in the future, you would definitely want to consider using a portion of it to give gifts while you are still alive.

CONCLUSION The estate tax and the gift tax are unified. The exclusion is a unified exclusion. If you use your exclusion giving tax-free gifts, you are reducing the amount that can be applied to your estate in the future. Therefore, generally speaking, the utilization of the unified credit or exclusion does not provide tax efficiency in the long-run.

Should I Use My Unified Exclusion During My Lifetime?


The best way to explore viable tax efficiency strategies would be to discuss everything in detail with a licensed estate planning attorney.

REFERENCES Forbes American Bar Association e_planning.html

Should I Use My Unified Exclusion During My Lifetime?


About the Author Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning. Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work. In addition to his practice, Mr. Kraft has lectured extensively in the areas of living trust planning, Medicaid planning, and presenting public and private seminars on the importance of proper estate planning. He has also authored various articles on estate planning and is a contributing author of LEGACY: Plan, Protect, and Preserve Your Estate–Practical Answers from America’s Foremost Estate Planning Attorneys. Mr. Kraft is a co-founder of the Indiana Network of Estate Planning Professionals, a charter member of the American Academy of Estate Planning Attorneys and a founding member of the National Network of Estate Planning Attorneys. He is also a member of the Indianapolis Bar Association, including the Taxation, Business Law and Estate Planning sections; the Indiana State Bar Association, including the section on Taxation Law; the Indiana CPA Society; and the Estate Planning Council of Indianapolis. Mr. Kraft is admitted to practice law before the Supreme Court of Indiana, U.S. District Courts, and U.S. Tax Court.

Frank & Kraft A Professional Corporation Attorneys at Law 135 N. Pennsylvania Street Suite 1100 Indianapolis, IN 46204-2485 Phone: (317) 684-1100 Fax: (317) 684-6111

Should I Use My Unified Exclusion During My Lifetime?


Should I Use My Unified Exclusion During My Lifetime?