Many clients looking to advanced estate planning often raise the issue of the so-called “unified gift tax credit,” which is actually a misnomer because the amount of credit which a testator receives is no longer unified with the federal estate tax exclusion, as in the past. Right now, unless Congress realigns the estate planning stars in the next year, you can give up to $13,500 to any one individual during the course of a year. You may give up to that amount to as many people as you like. So, for example, if you had 100 people on your Christmas list and wanted to give each of them $13,500 (I hope I’m on that list), you may do so without any tax consequences whatsoever. That means you would’ve move $1.35 million out of your estate “tax free.” Yes, you don’t even have to tell Uncle Sam about it.
The informational tax return kicks in only when you generously bestow any one person with more than $13,500 in any given year. So, by way of example, if you give each of those same 100 people $15,000 for Christmas, you would have to file IRS Form 709 for 2009 stating that you gave 100 people $1,500 each ($15,000 – $13,500 = $1,500). You only have to report the amount in excess of the annual gift exclusion. In this scenario, you would have to report a total of $150,000 on Form for 2009. That $150,000 is applied toward your lifetime gift tax credit of $1 million dollars.
In 2009, you were allowed to pass $3.5 million free of federal estate tax to your heirs. If, during your lifetime, however, you had gifted away $1 million, your estate could only pass along $2.5 million tax free. Yet, as I indicated in last week’s post on the expiration of the estate tax in 2010, come January 1st there will be no estate tax and therefore, no unified credit. Yes, Virginia, it evaporates, poof, into the clouds over Washington. However, when it returns in 2011 the amount of the estate tax credit and gift tax credit are once gain “unified,” with each being $1 million.
Now, while the House passed the Pomeroy Bill to extend the estate tax for next year, the Senate could not agree on a similar measure and that has lawmakers scrambling. While it might sound advantageous to die during this lapsed tax period, Rep. Earl Pomeroy (D., N.D.) fully expects that it will be extended and will be retroactive to January 1, 2010. That’s a lot of wishful thinking on Pomeroy’s part at a time when Congress is trying to put a band-aid on the tumor known as health-care in this country.
Oh, you should also be aware that there is a grey cloud to this upcoming break in the estate tax. If your loved one dies leaving you a house which is currently worth $1 million and they bought it back in the 1920s for $50,000, you must pay capital gains tax on $950,000. Previously, heirs would receive a “stepped-up basis,” meaning that they would inherit the property at the date of death value (in this case $1 million) but that also disappears, poof, into the tax black hole looming as 2010.
With so much on the proverbial Congressional plate, I will be amazed if they get it all done in the next 15 days.