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2017 Tax Cuts and Jobs Act Concerning Estate Tax Exemption

President Donald Trump’s vow to repeal the federal estate tax did not happen with the 2017 Tax Cuts and Jobs Act that was signed into law the week before Christmas.  Instead the federal estate tax exemption has doubled, which benefits high-net worth families.  Before we go into the specifics of the law, let’s first define the Federal Estate Tax.  This is a tax on property (cash, real estate, stock, or other assets) at death transferred from a deceased person to an heir, other than a surviving spouse.  Currently, only individual estates with total assets above the Exclusion Amount (currently $5.49 million) are subject to the estate tax.  The current estate tax rate is 40%.

The new Act has doubled the basic exclusion amount from $5.49 million per individual to $11.2 million for estates of decedents dying (and gifts made) after 2017 and before 2026.  The $11.2 million exemption is indexed for inflation.  At 01/01/2026, the exclusion amount is set to sunset back to the $5.49 million per individual, subject to inflation.   The tax rate remains at a flat 40% under the new law.

If the first spouse to die uses his or her exemption by passing wealth to heirs, or if portability is elected, the surviving spouse could have a $22.4 million estate exemption at the time of his or her death, as long as death occurs prior to 2026.  The portability election is an election that allows a surviving spouse to use a deceased spouse’s unused estate tax exclusion amount for estate tax at his or her death.   Even fewer estates will be subject to the estate tax with the higher exemption and the portability election.

For wealthy taxpayers, one option for anyone who does not plan on dying before 2026 (isn’t that everyone?), is to make gifts anytime between 2018 and 2025 to use up their exclusion.  This is a way to decrease their estate and be able to utilize the increased exemption before it reverts back to $5.49 million. Because this law “sunsets” on January 1, 2026, wealthy people will need careful planning, now and when the sunset date nears.   Also, since this was not a bi-partisan tax bill, it is always possible that a new election might bring new laws even before then.

On the other hand, it is often an “income tax” mistake to make large lifetime gifts, due to the loss of step-up in basis.   Step-up in basis occurs when a taxpayer passes away as almost every asset owned receives a new income tax basis, which is based on the fair market value at the date of death.  This can be very beneficial for the heirs of farmers/ranchers or other taxpayers who have property with a very low cost basis, such as land.  For example, the stepped-up basis reduces an heir’s capital gain when the asset is sold.  Also, stepped-up business assets, such as breeding stock, can be re-depreciated over their useful lives, possibly saving income tax dollars for the recipient.

Please contact our office if you have any questions on estate tax.

Michelle Minnerath

Michelle Minnerath

Michelle Minnerath joined the firm in 2005. She specializes in the Farm & Ranch industry, estates and trusts as well as small business and individual tax planning and return preparation.
Michelle Minnerath

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