Unified Credit

Lesson

The unified credit is a tax credit that allows individuals to transfer a certain amount of wealth to their heirs without incurring federal estate or gift taxes.

Practice Question #1

What is the primary purpose of the unified credit?

A) To offset federal income taxes

B) To offset federal estate and gift taxes

C) To offset state estate and gift taxes

D) To offset capital gains taxes

Select an option above to see an explanation here.

A) The unified credit does not affect federal income taxes. B) The unified credit offsets federal estate and gift taxes on a certain amount of wealth transferred. C) The unified credit does not affect state estate and gift taxes. D) The unified credit does not affect capital gains taxes.

Terms

Unified credit:: A tax credit that offsets the federal estate and gift taxes on a certain amount of wealth transferred during an individual's lifetime or at death.

Practice Question #2

Which of the following is NOT a component of the unified credit calculation?

A) Lifetime exemption

B) Annual exclusion

C) Marital deduction

D) Generation-skipping transfer tax

Select an option above to see an explanation here.

A) The lifetime exemption is part of the unified credit calculation. B) The annual exclusion is part of the unified credit calculation. C) The marital deduction is separate from the unified credit and allows spouses to transfer unlimited wealth to each other without incurring federal estate or gift taxes. D) The generation-skipping transfer tax is part of the unified credit calculation.

Do Not Confuse With

Marital deduction:: A deduction that allows spouses to transfer an unlimited amount of wealth to each other without incurring federal estate or gift taxes. This is separate from the unified credit.
Charitable deduction:: A deduction that allows individuals to transfer wealth to qualified charitable organizations without incurring federal estate or gift taxes. This is separate from the unified credit.

Practice Question #3

What is the primary difference between the annual exclusion and the lifetime exemption?

A) The annual exclusion applies to gifts given during an individual's lifetime, while the lifetime exemption applies to wealth transferred at death.

B) The annual exclusion applies to wealth transferred at death, while the lifetime exemption applies to gifts given during an individual's lifetime.

C) The annual exclusion applies to gifts given during an individual's lifetime, while the lifetime exemption applies to both gifts given during an individual's lifetime and wealth transferred at death.

D) The annual exclusion and the lifetime exemption both apply to gifts given during an individual's lifetime, but the annual exclusion is subject to a lower limit.

Select an option above to see an explanation here.

A) The lifetime exemption applies to gifts given during an individual's lifetime and wealth transferred at death, not just wealth transferred at death. B) The annual exclusion applies to gifts given during an individual's lifetime, not wealth transferred at death. C) The annual exclusion applies to gifts given during an individual's lifetime, while the lifetime exemption applies to both gifts given during an individual's lifetime and wealth transferred at death. D) The annual exclusion and the lifetime exemption serve different purposes and have other limits.

Historical Example

In the early 2000s, the unified credit was significantly lower than it is today, leading many wealthy individuals to create complex estate plans to minimize their estate tax liability. As the unified credit has increased, some of these strategies have become less necessary for many individuals.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A couple with a combined estate worth $20 million wants to leave their wealth to their children without incurring federal estate taxes. Using their unified credits, they can each transfer $12,920,000 (as of 2023) tax-free, allowing them to pass on their entire estate without incurring any federal estate tax.