ESTATE TAX CHANGES UNDER RECENT TAX ACTS

This article summarizes the changes made to the federal gift and estate tax and the federal generation-skipping transfer (GST) tax under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act), the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), and the Tax Cuts and Jobs Act. A chart at the end of the discussion summarizes the effects of this law.

BACKGROUND

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was a sweeping piece of legislation that significantly changed the federal gift and estate tax and the GST tax for the years 2001 through 2010. The maximum tax rates gradually decreased from 55% to 45% (35% for gift tax) and the exclusions/exemptions gradually increased from $675,000 to $3.5 million ($1 million for gift tax). The provisions of EGTRRA repealed the estate and GST taxes (but not the gift tax) for 2010; then, for 2011, EGTRRA provisions expired, effectively reinstating the tax rules that were in effect prior to 2001.

ESTATES OF PERSONS WHO DIED IN 2010

The 2010 Tax Act reinstated the federal estate tax for 2010, retroactively applying a 35% maximum estate tax rate and a $5 million estate tax exclusion. The 2010 Tax Act also allowed the estates of persons who died in 2010 to opt out of the tax. If an executor chose to elect out of the estate tax, estate property received a modified carryover income tax basis, and not a step-up (or step-down) in basis. Step-up (or step-down) generally means that the tax basis of the estate’s assets increases (or decreases) to fair market value at the date of death. The modified carryover basis regime carried over the cost basis of the deceased individual to the heir. It is “modified” because cost basis could be supplemented by a step-up in basis of $1.3 million of property, with a step-up in basis of an additional $3 million of property received by a surviving spouse.

The GST tax was also reinstated for 2010 with a $5 million exclusion, but with a tax rate of 0%.

The gift tax remained the same: a top rate of 35% and a $1 million exclusion.

EXCLUSIONS AND TOP TAX RATES IN 2011 AND 2012

For 2011 and 2012, the gift and estate tax basic exclusion amount was $5 million per person (as indexed for inflation, $5,120,000 in 2012); the top tax rate for these years was 35%.

Similarly, for 2011 and 2012, the GST tax exemption was $5 million per person (the $5 million was indexed for inflation in 2012, and thus was $5,120,000), and the GST tax rate for these years was 35%.

EXCLUSIONS AND TOP TAX RATES IN 2013 TO 2017

For 2013 to 2017, the gift and estate tax basic exclusion amount was $5 million (as indexed for inflation) per person ($5,490,000 in 2017); the top tax rate for these years was 40%.

Similarly, for 2013 to 2017, the GST tax exemption was $5 million (as indexed for inflation) per person ($5,490,000 in 2017); the GST tax rate for these years was 40%.

EXCLUSIONS AND TOP TAX RATES IN 2018 AND LATER YEARS

The Tax Cuts and Jobs Act doubled the gift and estate tax basic exclusion amount to $11.18 million in 2018 (indexed annually for inflation). The exclusion is $11.4 million in 2019. After 2025, the exclusion is scheduled to revert to its level prior to 2018 and be cut by about one-half. The top tax rate for these years is 40%.

Similarly, the GST exemption is $11.18 million in 2018 (indexed annually for inflation). The exemption is $11.4 million in 2019. After 2025, the exemption is scheduled to revert to its level prior to 2018 and be cut by about one-half. The GST tax rate for these years is 40%.

PORTABILITY OF GIFT AND ESTATE TAX EXCLUSION

The 2010 Tax Act introduced a new estate planning concept—exclusion portability. In short, the estate of a deceased spouse can transfer to the surviving spouse any portion of the federal estate tax exclusion that it does not use. The surviving spouse can then add that amount to the exclusion he or she is otherwise entitled to, increasing the total amount that can be passed on tax free. This new feature makes it easier for married couples to minimize the potential impact of gift and estate tax.

Prior to the 2010 Tax Act, if a spouse died without having planned for his or her exclusion, the deceased spouse’s estate would have passed tax free to the surviving spouse under the unlimited marital deduction (assuming all assets passed to the surviving spouse), and the deceased spouse’s exclusion would be lost or “wasted.” The surviving spouse’s estate could then only transfer an amount equal to his or her own exclusion free from federal estate tax. To solve this dilemma, married couples typically set up what is commonly referred to as a credit shelter trust (or bypass trust) that sheltered or preserved the exclusion of the first spouse to die. Portability can achieve a similar result without the use of a credit shelter trust.

To use the exclusion portability, the estate of the first spouse to die must elect to use portability on the estate tax return. An estate tax return must be filed by the estate of the first spouse to die to use portability even if the return is not otherwise required to be filed.

Exclusion portability is available only from the last deceased spouse. The exclusion of the first spouse will be lost if the surviving spouse remarries and is predeceased by the second spouse. In other words, if the surviving spouse survives Spouse 1, the surviving spouse can use Spouse 1’s unused exclusion even if the surviving spouse marries Spouse 2. However, if Spouse 2 also predeceases the surviving spouse, the exclusion of Spouse 1 can no longer be used. However, the surviving spouse can then use the unused exclusion of Spouse 2.

Tip: The portability feature is available to the estate of a deceased spouse dying in 2011 and later to transfer the unused exclusion of the deceased spouse to the surviving spouse.

Caution:The portability feature applies only to the gift and estate tax; it does not apply to the GST tax. Without a trust, any unused GST tax exemption of the first spouse to die will be lost.

SUMMARY OF PROVISIONS 2018-2019

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IMPORTANT DISCLOSURES

This text is prepared for Fairman Group Family Office by Broadridge Investor Communications Solutions.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.