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Estate and Gift Tax Changes: Time to revisit your Estate Planning Strategy?

Tiffany L. Kuntemeier

February 18, 2020

On Jan. 1, 2020, the federal estate tax exemption increased from $11.4 million to $11.58 million per individual. For company owners or other taxpayers with significant net worth, today’s higher exemption levels mean now is a good time to revisit their estate planning strategies to minimize taxes and maximize the value of their estates.

Fluctuating Exemption Levels

The federal estate tax is imposed on estates over a certain value—a value the IRS calls the “basic exclusion amount.” This exclusion amount (or exemption) is a lifetime total. In other words, it represents the amount you can give to your heirs—either during your lifetime or upon your death—without having to pay federal estate taxes.

Over the years, the value of that exemption has varied considerably, from as low as $600,000 per individual in 1997 to this year’s $11.58 million. The biggest increase came about with passage of the 2017 Tax Cut and Jobs Act (TCJA), which temporarily doubled the exclusion amount from its previous level around $5 million. The law also provided for annual adjustments for inflation, which is how the current $11.58 million figure was determined.

Moreover, the $11.58 million exemption applies to each individual. The concept of portability allows any unused exemption to be passed on to a surviving spouse. Thus, with proper planning, a married couple could shield as much as $23.16 million from federal estate taxes using the current exemption amounts.

Act Now

Note, however, these numbers are subject to change. The TCJA’s doubling of the exemption will expire at the end of 2025 unless Congress acts to extend it. Without such action, the exemption will revert to $5 million plus an adjustment for inflation. In addition, some of the 2020 presidential candidates have proposed reducing the exemption further.

To help mitigate some of the uncertainty surrounding future exemption levels, the IRS pledged in 2018 that taxpayers who take advantage of the temporary doubling of the basic exclusion amount would not be adversely impacted when it drops back down in 2026. In effect, the IRS said it would allow an estate to use either the exclusion amount in effect on the date of death or the amount that was in effect at the time gifts were made during the taxpayer’s lifetime.

As a result, many taxpayers who expect to leave sizable estates are taking advantage of the higher exclusion amounts by transferring assets—particularly appreciating assets—to their heirs now. Bear in mind also that, outside of the lifetime estate tax exemption, federal tax law also allows taxpayers to make tax-exempt gifts of up to $15,000 apiece to as many individuals as they choose every year.

Other Factors to Consider

Federal estate taxes are only one of many factors to consider as part of a comprehensive approach to estate planning. Twelve states plus the District of Columbia impose their own estate taxes, with rates and exemption amounts that vary widely. Another six states impose inheritance taxes, which are collected from the recipients rather than being paid by the estate.

Beyond outright gifts, company owners or others with significant net worth should investigate the numerous other estate planning strategies that are available to them. Qualified estate planners can provide access to various types of trust structures and other tools that taxpayers can use to minimize the tax burden to their estates—and avoid creating new tax issues for their heirs.

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