For many people the estate tax is a looming threat that can significantly reduce the value of your assets as you attempt to pass them on to your loved ones upon your death. Just who must pay the estate tax and who is not required to pay it is difficult to pin down because the dividing line tends to vary on a year-by-year basis, and this is one of the reasons why many people support a repeal of the tax. That having been said, at present the estate tax exclusion is $5 million, and this means that the portion of your estate that exceeds this amount in value is subject to the 35% federal death levy.
These estate tax parameters were put in place as a result of the passing of the tax relief act at the end of 2010. Also included in that act was a change in the gift tax parameters. The lifetime gift tax exemption had previously been $1 million, but it too was raised to $5 million and the rate of the tax was set at 35% to match the estate tax.
When you hear about these changes it would be logical to assume that you have two distinct exemptions available to you, but this is not the case. According to IRS regulations the estate and gift taxes are “unified,” meaning that your available estate tax exclusion will be reduced by any portion of your gift tax exemption that you use giving gifts during your lifetime. So if you give $1 million in gifts while you are alive utilizing the unified gift/estate tax exemption your available estate tax exclusion would be $4 million.
However you have to remember that the unified exclusion is available to each individual. So, if you are married you and your spouse would have a $10 million total combined gift and estate tax exclusion available to you as a couple.