Unified Tax Credit
The Estate Tax and the Gift Tax combine to insure that a great amount of your estate is given to Uncle Sam when you die. The Unified Tax Credit allows most of it to go to your heirs.
Unified Tax Credit
The Economic Growth and Tax Relief Reconciliation Act of 2001 established the Unified Tax Credit and changed the structure of the Estate and Gift Tax for the next decade. One of the provisions of the Act is to eliminate the Estate Tax entirely in 2010 although it is scheduled to be reinstated a year later in 2011. In the meantime, there are a number of yearly changes and phase-outs that will take effect.
The Unified Tax Credit gives each person a credit of $780,800 against their estate tax in the years between 2006-2008. At the Estate Tax rate during this period, this would amount to the ability to have 2 million dollars in your estate that could be passed on without any tax liability. Since the credit would apply also to a spouse, a married couple could have up to 4 million exempt from taxes during this period using the Unified Tax Credit.
In 2009, the exemption credit soars to over 3 million dollars. The next year the Estate Tax will be gone, but will return in 2011 unless Congress extends the repeal. If it does return in 2011, the exemption is set to be at an even 1 million dollars. The gift tax exemption stays at a steady 1 million dollars starting in 2006 and continuing until 2010 when the Estate Tax repeal takes place.
There are two important things to note here. The first is that a large majority of the population is not going to have to worry about either Estate Tax or Gift Tax for the next few years. Since your estate needs to exceed 2 million dollars before any tax is paid, it is pretty obvious that the average taxpayer is left merely wishing it was his problem. The Unified Tax Credit is your protection that whatever you happen to accumulate during your lifetime will go to your heirs when you die. If you end up owing Estate Tax, it is only because you have done very, very well.
The Unified Tax Credit and the whole issue of taxation and estate planning is not a matter that should be ignored by the average tax payer, however. It is not only critical that your estate is properly structured and administered to insure that you benefit from such things as the Unified Tax Credit, but also that you keep yourself aware of the political implications and issues involved. The tax codes were not found carved on stone panels, but are a constantly changing set of laws that reflect the political climate of the country. It is to your benefit to stay abreast of this climate and let your wishes be known at the voting places.