Donald M. Thompson - Wills, Trusts, and Estate Planning


Credit Against Tax/Unified Credit

There is a credit against the estate and gift tax. The effect is to exempt $1,500,000 from the tax. The amount of the credit is scheduled to rise in the future so the tax free amount for estate tax purposes will be $2,000,000 in 2006 and $3,500,000 in 2009. The gift tax credit allows $1,000,000 to pass tax free and is not scheduled to rise.

1. The credit can be used for lifetime gifts (up to $1,000,000) or gifts at death. Use is optional. You must claim it.

2. Any used during life cannot be used at death.

3. In larger estates the available gift tax credit is often used up for lifetime gifts to children of property that will appreciate. This way all the appreciation is removed from the parents' estates, i.e., stock in a growing family business.

4. The credit can be used by married persons at death to give $3,000,000 tax free to the kids. The key is for each spouse to give $1,500,000 estate tax free to the kids and not the other other spouse. This means that each spouse must have $1,500,000 of separately owned property suitable for this purpose. This is why jointly held property is seldom suitable for larger estates - the surviving spouse automatically gets all the jointly held property, not the kids.

These $1,500,000 gifts can be outright, but they seldom are since people don't want kids to get money outright and because the use of a trust allows the surviving spouse to have the income from the $1,500,000 provided certain limits are obeyed. The spouse doesn't have to get the income though. The children can get it or the spouse and children can share it.

These trusts are usually called family trusts because they are usually for the spouse and children. Sometimes they are called credit shelter trusts because the amount in them is sheltered from tax by the credit. So if a trust is used and you give $1,500,000 to your kids to save taxes your spouse can get the income from it just as if you have it to him or her.

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Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
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