With the advent of the Tax Cuts and Jobs Act of 2017, the estate, gift and generation skipping tax exemptions increased significantly for U.S. taxpayers. This key provision of the tax reform bill has been monitored closely, as it affects numerous individuals.
What are the current estate tax exemption amounts?
As of 2019, the exemption stands at $11,400,000 and in 2020 is expected to increase to $11,580,000, based upon the U.S. Bureau of Labor Statistics’ August 2019 Consumer Price Index. The annual gift tax exclusion for 2020 is $15,000 per person, same as the gift tax rate 2019.
Under the current tax law, the higher estate and gift tax exemption will sunset on December 31, 2025. Starting January 1, 2026, the exemption will return to $5 million adjusted for inflation. With inflation, this may land somewhere between $6 million and $7 million.
What do the trust and estate income rate changes look like for 2019? Learn more.
What is the future of the estate and gift tax exemption?
The enactment of Tax Cuts and Jobs Act not only increased the exemptions, it kept the stepped-up tax basis available at death, as well as the benefit of portability.
The new tax law provided several taxpayers a sense of relief because they believed they were no longer subject to estate, gift and generation skipping tax. What taxpayers need to remember, however, is that the law has the potential to change.
Portability
Portability, an estate and gift tax provision, allows the personal representative (or executor) of a deceased spouse to make an election on the decedent's estate tax return to transfer a deceased spouse's unused exclusion amount to the surviving spouse
There have been numerous discussions related to revisions to the estate, gift and generation skipping exemptions and some have even proposed repealing the step up in basis at death, which could affect all taxpayers.
Since the beginning of 2019, there have been several bills proposed related to the estate and gift tax exemption. One bill provides for the reduction of the exemption to $3.5 million and suggests an increase in the estate and gift tax rates from 45% to 77%. Another bill introduces a flat rate of 20%.
There have been other proposals seeking to accelerate the expiration of the increased exemption amounts. This could be a significant revenue raiser which could be used in passing other legislation coming through the House Ways and Means Committee.
From the variety of legislation being introduced, it is easy to understand why the future of the estate and gift tax rate exemption is unclear. And, much of this uncertainty is due to the unknown of upcoming political outcomes. It continues to be a source of discussion in multiple debates as well as the upcoming presidential election.
How can you utilize the estate and gift tax exemption today?
The recent drop in the section 7520 rates may be a reason to revisit your current estate planning situation. Section 7520 rates are used for numerous gifting techniques. The 7520 rates for October dropped to 1.8% (Revenue Ruling 2019-23), down from 3.4% in January of this year. The lower 7520 rate makes the use of techniques of Grantor Retained Annuity Trusts and Sales to Defective Trusts more beneficial, especially when one works in in the higher exemption amounts and valuation discounts currently available.
While we may not know the future outcome of the exemption, we do know its current status. If you are considering using the higher exemption available today, talk to your business advisor to be sure you understand the tax and cash flow consequences of using your estate, gift or generation skipping exemptions while the higher exemptions are available.
What should you do to plan for a possible change to the exemptions?
The future of the current estate tax exemption is unclear, but there are still things you can do to prepare:
- Draft your estate documents.
- If they are already drafted, make sure they are up-to-date.
- Work with your business advisor to ensure you have the information you need to make informed decisions about your estate plan from a tax perspective.
Ultimately, you’ll need to allow for flexibility to address upcoming changes. It is important for taxpayers to be informed and prepared to be ready to address any potential changes in the estate tax law.
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