"Fun" Facts about the Gift Tax, Part 3: The "Unified" Credit

11. The last major credit or exclusion from gift tax is called the "unified credit." It's found in Section 2505 of the Code.

12. The unified credit is currently $1 million, which means you can give away up to $1 million during your lifetime without owing gift tax. Note that this credit works in tandem with the annual exclusion amount. So, for instance, if you gave $100,000 to your daughter in 2007, you would get the $12,000 annual exclusion, and your unified credit would be reduced by only $88,000 (100 - 12).

13. The unified credit used to be, well, unified -- it was tied to the estate tax credit. In other words, there was one credit amount, which could be used during life or upon death.

14. In cases where you make gifts that exceed the annual exclusion, you'll still need to file a gift tax return, even if no gift tax is due. This is so the IRS can keep track of (and potentially challenge) the amount of your unified credit remaining.

15. With all this in place, would anyone ever need or WANT to pay gift tax? I don't know about "want," but in cases involving high net worth individuals, it may be better to make gifts now, and pay gift tax instead of estate tax. Obviously you lose with respect to time value of money (it's better to pay tax later rather than sooner), but you gain a couple of ways:

-You get property and its future appreciation out of the estate. The $1 million you give away today may be worth $2 million (or $3 or $10 million) when you die.
-The estate tax is calculated on the total value of the decedent's estate, including the money being used to pay the estate tax. That's not the case with the gift tax.