The Tax Cuts and Jobs Act (the “Act”) increased the federal estate tax exclusion amount from $5 million to $10 million indexed for inflation for decedents dying in years 2018 to 2025. This amount is indexed for inflation back to 2011. The exact amount of the exclusion amount is not yet known for 2018. However, it is estimated to be $11.18 million. This means that an individual can leave $11.18 million and a married couple can leave $22.36 million dollars to their heirs or beneficiaries without paying any federal estate tax. This also means that an individual or married couple can gift this same amount during their lifetime and not incur a federal gift tax. The rate for the federal estate and gift tax remains at 40 percent.
The doubling of the basic exclusion also means that the Generation Skipping Transfer Tax (GST) exclusion is doubled to match the basic exclusion amount of $11.18 million for an individual and $22.36 million for a married couple.
The sunsetting of the doubled basic exclusion amount after 2025 raises the prospect of exclusions decreasing in 2026. Taxpayers with estates over $11.18 million will want to discuss with their estate planning attorneys the potential for making transfers to take advantage of the larger exclusion amount before the anticipated sunset.
The Act does not make changes to the rules regarding step-up basis at death. That means that when you die, your heirs’ cost basis in the assets you leave them are reset to the value at your date of death.
The Portability Election, which allows a surviving spouse to use his or her deceased spouse’s unused federal estate and gift tax exemption, is unchanged. This means a married couple can use the full $20,000,000 exemption (indexed for inflation). To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse’s estate.