Unified Credit

Unified Credit

The Unified Credit refers to a tax credit that allows individuals to offset the amount of federal gift and estate taxes owed. Essentially, it serves to unify the treatment of gift and estate taxes under a single exclusion amount, which has been set by the Internal Revenue Service (IRS).

The Unified Credit is critical in estate planning as it determines how much an individual can transfer to heirs, either during their lifetime (as gifts) or at death (through their estate), without incurring federal taxes. As of 2023, the Unified Credit effectively exempts up to $12.92 million per individual from estate and gift taxes. This means that an individual can transfer up to this amount without having to pay federal taxes on those transfers.

For example, if a person gifts $5 million to their children while still alive, they can apply $5 million of their Unified Credit against the total amount they can transfer without tax implications. If they later pass and their estate is valued at $10 million, they would only be taxed on the amount exceeding the remaining Unified Credit. Therefore, understanding the Unified Credit is essential for effective estate planning to maximize wealth transfers to beneficiaries while minimizing tax liabilities.

In Texas, and specifically in areas like Houston, the Unified Credit applies similarly, but it is important to consider state estate tax laws, as Texas does not impose a state estate tax. This means that estate plans in Texas can often take advantage of the full federal Unified Credit without additional state tax considerations.