Series 66
Analyzing Your Client's Financial Profile - Estate and Gift Taxes
Unified Estate and Gift Tax
The total of all taxable gifts given during a person's lifetime plus taxable amounts transferred upon death are subject to a unified estate and gift tax. Estate taxes and gift taxes are interrelated, since the federal government applies the Unified Estate and Gift Tax Credit (also known as the Unified Credit) to both types of transfers of property.
Because this area of tax law is complex, clients with large estates should be advised to work with an estate planning specialist to create an estate plan that minimizes potential taxes.
While income taxes are paid by the person who receives the income, gift and estate taxes are paid by the person or entity that transfers the money. Gift taxes are paid by the donor, and estate taxes are paid by the estate. These taxes are progressive, meaning the tax rate increases with the size of the gift or estate.
Unified Estate and Gift Tax Credit
This amount has changed significantly over the years and is scheduled for additional changes in the future.
- The Unified Credit stayed at $600,000 for many years, until a tax law change set it to increase to $1,000,000 over a period of years.
- Another tax law change in 2001 made a significant change to the schedule. Essentially, it dramatically increases the amount of an estate that is excluded from taxation from 2001 through 2009, and then it entirely repeals the tax in 2010.
- However, due to budget pressures, this entire schedule is effectively repealed in 2011! Unless additional legislation passes at that time, the Unified Credit amount will revert to the amount under the original schedule for 2001. This makes estate planning for the wealthy client quite a challenge.
- See the following page for a table displaying current exclusion limits.
According to the 2006 IRS Code, each person can gift up to $12,000 each year to an unlimited number of people. This is one way for wealthy people to reduce their estate prior to death. A married couple can gift $24,000 per year per beneficiary.
| Look Out! This gift limit is indexed for inflation. It had been at $10,000 for many years before an indexing factor was permitted. As a result, the exam refers to the gift tax exclusion as "$10,000 indexed for inflation annually." |
Gifts in excess of this annual amount may still be given free of tax. However, a gift tax return must be filed, showing the amount of the gift and the amount of the Unified Credit that is being taken. The maximum amount of lifetime gifts that can be given tax-free under the Unified Credit is $1,000,000. This is a lower amount than the basic Unified Credit (see the table below).
Estate tax exclusion
The maximum amount of estate value (including lifetime taxable gifts) excluded from taxation is shown in the following table:
| YEAR | Amount Excluded |
| 2004-2005 | $1,500,000 |
| 2006-2008 | $2,000,000 |
| 2009 | $3,500,000 |
| 2010 | Tax Repealed |
Nevertheless, not all transfers upon death are taxable. There is an unlimited marital exclusion that applies to direct transfers or certain transfers in trust to the surviving spouse. Such amounts would then be subject to estate tax when the second spouse dies, unless they were gifted away or spent prior to that second death. The unlimited marital exclusion also applies to lifetime gifts.
| Exam Tips and Tricks Consider these sample exam questions: |
- One $24,000 gift to one niece
- Two $12,000 gifts to two nieces
- Two $24,000 gifts to two nieces
- One $10,000 gift to one niece
- I only
- II & IV
- II & III
- I, II, III, & IV
The correct answer is "b" - since there is no information that the aunt is married, the transfers of $24,000 would be subject to gift tax
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