In recent years, the Federal estate tax exemption amount has changed several times. The current exemption amount for 2021 stands at $11.7 million. Absent legislation, this exemption amount is scheduled to sunset as of January 1, 2026, at which time it drops back down to $5.49 million (adjusted for inflation). The current exemption essentially puts many high net worth taxpayers into a bracket in which they may no longer have to pay Federal estate tax and changes how individuals may choose to approach their estate planning activities. Items like annual gift tax exclusions, the review of your spouse’s accounts, and revisiting estate plans that may have become outdated are good areas to focus on when establishing a new and improved approach to your estate planning.
Whether or Not to Utilize Annual Gift Tax Exclusions
With the relief offered to taxpayers given the $11.7 million Federal estate tax exemption, you may want to take a second look at how you are handling your annual gifting. Many have previously chosen to make an annual monetary or property donation to their loved ones in order to claim the gift tax exclusion (currently $15,000 per donee) that often accompanies these types of gifts and reduce their estate tax bills. The benefit to the donor of transferring assets (and the appreciation on those assets that happens subsequent to the gifting) is that it excludes those assets and the appreciation from the donor’s estate and passes both over to the donee at the time of transfer.
You should note, however, that your annual exclusion transfer of appreciated property could trigger an increase in income tax for your intended recipient, as the recipient also inherits the donor’s cost basis at the time of transfer which could translate to a capital gains tax consequence for them. If your estate will no longer be subject to Federal estate tax, even if the gifted property grows in value, then you may want to base your decision to make a property-related gift on other factors or even consider setting up an automatic property transfer to be made at the time of your death, instead. Under current law, if your recipient receives property upon your death, they will also receive a step-up basis that eliminates the capital gains tax on all pre-death appreciation of the property’s value.
Revisiting Your Spousal Account Strategy
Prior to the current change to estate exemptions, spouses would often look for ways in which to equalize their estates so that each partner could optimize the estate tax exemption amount they were independently entitled to. With the Federal estate tax exemption now in play, reviewing the go-forward viability of that strategy is a wise idea.
In the past, a two-trust plan could be established to reduce the amount of estate tax a couple collectively owed. Estates of decedents who passed away after 2010 can elect to take advantage of “portability” which allows a transfer to the surviving spouse of the decedent’s unused exclusion amount at the time of that spouse’s demise. Essentially, portability allows the surviving spouse to apply the unused portion of a decedent’s applicable exclusion amount (the deceased spousal unused exclusion amount or DSUE) as calculated in the year of the decedent’s death. In exercising the portability option, married couples benefit from the increased flexibility of deciding how to utilize their exclusion amounts.
New Property Gifting Strategies for Current Times
In light of the recent changes, it may make sense to hold off on transferring property during your lifetime and either include it in your estate or refrain from taking valuation discounts in order to allow your heirs to receive the step-up basis with less of an eventual tax consequence for them. If, for example, the valuation of qualified real property which takes into consideration the basis of the property’s actual use, isn’t offsetting your estate tax bill more than the step-up basis may benefit your heirs, you may choose to leave the property as part of your estate.
Estate planning and the gifting associated with it can be complex so check with your Untracht Early tax advisor to learn more about how the Federal estate tax exemption impacts you and the best strategies to use, in the near future.
