Estate and gift tax exclusion limits require careful planning

The Trump estate and gift tax exemption may expire in 2025. Plan ahead with your tax attorney.

The 2017 Tax Cut and Jobs act doubled to $11 million the lifetime gift tax exclusion and estate tax exemption. While this, no doubt, is cause for celebration among those whose estates are valued in the “bubble” between the old limit of $5 million and the $11 million limit, there is a potential problem. The current limit is set to expire in 2025, possibly reverting to the old limit of $5 million.

Is there anything these “bubble” dwellers can do to protect their heirs from tax if the exempt amount if the Trump estate tax reverts to the old $5 million limit after 2025?

Flexibility is crucial

Since no one can know with certainty what will happen to the exemption limit after 2025, having the flexibility to change a bequest is very important. One way to achieve that flexibility is to use a revocable trust instead of a will. While wills can be changed anytime a person has the capacity to sign it, that capacity could be threatened by a change in health or cognition. With a trust, the provisions can be modified if the person is incapacitated. This can be achieved by naming a trust protector and providing for broad discretionary distribution provisions. Even without trust provisions that allow the trust to be modified, many states provide for trust modification to minimize tax and address unforeseen circumstances. In any case, the flexibility of a well-designed revocable trust allows for effective tax planning in the event of a $5 million IRS estate tax exemption or an $11 million exemption.

Step-up in basis

Dual uncertainties for people with highly appreciated assets require some planning so heirs avoid having to pay the IRS estate tax. The first uncertainty is death itself – difficult to set a hard date for that inevitability! The second uncertainty is whether the estate and gift tax exemption will revert to $5 million after 2025. Review asset valuations with an eye to holding on to highly appreciated assets at death. The step up in basis that automatically kicks in for beneficiaries will decrease the amount of the estate subject to tax. Also, depreciated assets can reduce the tax liability of heirs, so those should be held at death, too.

Obviously, recording the value of assets accurately will increase the likelihood that the step-up in basis effectively reduces the estate tax liability of beneficiaries, under the Trump Estate Tax limit of $11 million or the previous limit of $5 million that may be reapplied after 2025. Beneficiaries of estates will be best served by carefully documenting the date of death value of all assets, to optimize any step-up in basis for themselves and for their future heirs.

Portability

For those married couples with estates valued over $5 million, it is important to elect portability before 2025. This allows the surviving spouse to inherit the unused portion of the spouse’s lifetime gift and estate tax exemption, which means the spouse can inherit up to $22 million without estate tax liability. Of course, it is possible that figure will revert to $11 million after 2025.

A tax attorney who understands the estate and gift tax can help you immeasurably when faced with these complex questions, made more complex by the uncertainties of the estate tax moving forward.

 

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