Most of us are familiar with paying income tax when we get a paycheck.
Similarly, when a person gifts a large amount of money (over $15,000) to someone a gift tax is imposed. Even at death, the assets we leave to beneficiaries (our estate) are taxed. In 2018, the federal estate tax is 40% of the estate.
In December 2017, the Tax Cuts & Jobs Act was passed into law and resulted in broad tax reform across multiple disciplines. One change was an increase in the unified credit (UC).
The UC is the amount of assets a person may gift or transfer during their lifetime or after death without triggering gift or estate taxes. The UC unifies one credit for two tax systems: gifting and estates. Simply stated, it is a credit that decreases the tax bill of the individual or estate.
The tax reform increased the UC amount from $5.49 million in 2017 to $11.18 million in 2018 (double that amount for married couples), and it will continue to increase with consumer indexing until the end of 2025. The change will expire on Jan. 1, 2026, when the UC will drop back to its original levels. Therefore, if you don’t use it now, you could lose the opportunity.
For example, if an individual dies within the next seven years and leaves $10 million to his or her beneficiaries, the UC can cover the entire amount and the estate tax will not be triggered. However, say the deceased individual already used $5 million of their UC to avoid gift taxes while alive. Due to the tax reform, they still have $6.18 million that they can gift or bequest before Dec. 31, 2025.
Thanks to the UC, only a small percentage of estates – two out of every 1,000 in 2017 – are faced with paying the 40% estate tax rate.*
In summary, there are benefits to the tax reform if you are in a position to transfer wealth as part of your legacy. Talk to your planning professionals who can help you determine whether this fits into your strategy.
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This information is provided for informational and educational purposes only and may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to assist in understanding the issues discussed. Waddell & Reed does not provide tax advice. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided.