The effects of the 2017 Tax Cuts and Jobs Act has a simple but large impact on the Estate Tax world. The federal exemption increased from $5.49 million per person in 2017, to $11,180,000 in 2018. However, the increased exemption sunsets after December 31, 2025. What this means is that there will be a decrease in taxable estates for the next eight years. According to the Estate Tax Statistics provided by the IRS, there were 12,411 federal estate tax returns filed in 2016 nationwide. Of these, only 5,219 were taxable and only 2,204 of these taxable returns had a gross estate of over $10 million. This shows that for the next eight years, we can expect only around 2,204 estate tax returns to be subject to tax each year across the United States.
However, it still may be beneficial to file a federal estate tax return upon the death of a spouse. The reason is so that portability can be used to take advantage of this increased exemption before it expires on December 31, 2025. Portability allows the decedent spouse’s unused exemption to be carried over to the surviving spouse.
For example: A married couple has assets in the amount of $17 million. One spouse dies in 2018 and all assets transfer to the remaining spouse. Due to the marital deduction, there is no tax on the transfer. Their CPA files a federal estate tax return electing portability of the decedent’s entire $11,180,000 federal exemption. The remaining spouse dies in the year 2026 with the estate still at $17 million. The spouse is then able to use the $11,180,000 exemption from the other spouse, and their own exemption which at that time is indexed to be around $6 million. In this scenario, the couple was able to take advantage of the temporary federal exemption and prevent having to pay any federal estate tax.
Another way to benefit from the increased federal exemption is to give gifts during the next eight years. The gift exemption is also increased to be $11,180,000. However, you do not get both, for every amount of gift exemption the taxpayer uses, their estate exemption decreases by the same amount. These gifts allow a taxpayer to transfer wealth during their lifetime and still take advantage of the increased exemption. Analysis should be done on what type of assets should be gifted. It is generally not recommended to gift assets in which the taxpayer’s basis is low but has appreciated in value. This is because the basis is not stepped up to fair market value when assets are gifted, rather the donee keeps the donor’s basis.
How Froehling Anderson Can Help
We can review your unique situation and talk through the options available to you during this temporary increase to the federal estate tax exemption through December 31, 2025. Call us today.