Act Fast Before Tax Changes Transform Estate Planning and the Unified Credit
When money transfers from one party to another, either through a gift or inherited estate, the IRS does not tax the money…up to a certain amount. Above and beyond that amount, the tax bill becomes significant. While there were strong indications that the law might change this year it now looks like the law will remain as is for the time being. However, the possibility of a law change makes now an important time to consider gift and estate planning.
The Unified Credit Explained
You can give money away during your lifetime or after you have passed away. The combined total amount that you can give away tax free is known as the unified credit. The unified credit limit was $11.7 million in 2021. Any money gifted during your lifetime or after death above and beyond the cumulative unified credit amount of $11.7 million is subject to estate and gift tax at 40%.
Married couples often combine their unified credit for a total of $23.4 million and many take advantage of the annual gift exclusion which does not count against the unified credit.
Congress increased the unified credit with the passage of the Tax Cuts and Jobs Act of 2017. These changes are set to expire at the end of 2025, after which the credit will revert to the pre-legislation amount of $5.49 million, or around $6 million when adjusted for inflation – cutting the unified credit almost in half.
There are numerous things you can do in the next four years to take full advantage of the unified credit at its current peak – unless policy changes make the timeline much shorter.
Big Changes Coming?
President Biden’s proposed tax plan includes a provision to lower the unified credit to $3.5 million for individuals. It would also increase the tax rate to 45% for gifts and estates with a cumulative value above the limit.
To put into perspective how drastic these changes would be, a person that inherits $11 million would, until 2026, pay no federal estate taxes. That same person would pay almost $3.4 million in taxes under the president’s proposed plan.
Whether that plan will become law remains to be seen. Some experts think the provisions to lower the unified credit and raise the estate tax will get dropped before the bill becomes law. Until that happens, though, they are still on the table, meaning that sudden and sweeping policy changes could throw your estate plans out the window.
Be Proactive About Estate Planning
Whether the unified credit drops by a lot in the short-term or drops by somewhat less in a few years, changes are coming. It’s always better to be proactive when it comes to estate planning. Instead of waiting to see what happens then adapting after the fact, consider this an opportune moment to focus on estate planning. The moves you make now could save your heirs enormous sums in taxes.
Remember: The estate tax only applies to gifts or bequests over $11.7 million under current law. Most people won’t need to worry about the unified credit. High-net worth individuals, on the other hand, need to plan carefully around the limits for gifts and estates. Do so with the expert guidance of a trusted financial partner. Contact Proseer for tax and estate planning tailored to your goals.
