All U.S. taxpayers have the benefit of an exemption equivalent, which is often still referred to as the unified tax credit. This allows individuals to make lifetime gifts and transfers at death of property valued up to certain amounts. It works in the form of a credit, taken on client tax returns, against taxes that would otherwise be assessed on gifts and estate transfers.
Even though it is treated as a credit, for planning purposes it is often discussed in terms of the dollar amounts that the exemption shelters. For 2003, the maximum amounts for both gift and estate taxes are set at $1 million. Over the course of this decade, the credit available for transfers at death is scheduled to slowly increase, in steps, up to $3 million, while the lifetime gift amount will remain at $1 million.
This exemption against gift and estate taxes is a central part of virtually every written estate plan and is used for a wide variety of estate planning techniques. Many advisors recommend that clients make lifetime gifts into irrevocable trusts set up to maximize this exclusion. By transferring assets into a trust intended to maximize the exemption amount, clients can shelter the assets and all future growth from future estate and gift taxes.
The exemption is particularly valuable to married couples. Even though a lifetime transfer of assets into these trusts often makes sense, most clients hold onto this exemption amount until their death. Even with this delay, the exemption still can be valuable. Many estate plans allow for assets to be segregated into a trust using this exemption after the death of the first spouse. If these assets werent set aside into this trust, the deceased spouses exemption would be wasted. By funding a trust up to the exemption equivalent amount ($1 million for this year), those assets and all growth are protected from future estate taxation.
On the death of the surviving spouse, they can shelter some or all of their remaining assets with the use of their own exemption. With proper planning and with proper titling of assets, a husband and wife can shelter up to $2 million of assets from estate taxes at their deaths.