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The Tax Cuts and Jobs Act of 2017, signed by the President on December 22, 2017, increased the estate tax exemption to $11.2 million per person. In 2019, based on adjustment for inflation the exemption amount per person has risen to $11.4 million.
For a married couple upon the death of the first spouse, the survivor can add the deceased spouse’s exemption amount to theirs. This is done by electing portability. In 2019 Portability allows a surviving spouse to shelter over $22.4 million on their death.
In 2026 without further legislation, the exemption amount will return to 2017 levels. Adjusted for inflation, this amount is estimated to be $6.5 million per person.
Another important feature of the Act allows persons to make large gifts without paying a gift tax. The catch is the amount of the gift reduces the amount of the lifetime exemption at death. Many wealthy individuals like to make gifts now of assets that will appreciate in order to remove the appreciation from their estate. Here assets with high basis are often gifted as the ability to step up in basis on death is lost with the gift.
If the gifts are small, they do not count against the reduction of the lifetime exemption. For instance, in 2019, $15,000 tax free gifts can be made to anybody without using up part of the $11.2 exemption.
For those who have done advanced planning already, the amount of their unused lifetime gift tax exemption continues to be available.
The step-up in basis rule remains unchanged. Basically step-up in basis lets one inherit an asset without having to pay a capital gains tax on the “appreciation.” Generally, the market value on the date of death becomes the new basis for the property. For those that have held real estate for years, that have exchanged properties using 1031 exchanges, or that have depreciated them over time, the holding of those properties until death can lead to significant tax savings as those properties generally have a very low basis.
In 18 years we have gone from 52,000 estate tax returns owing taxes to approximately 1,800 or fewer, according to estimates from the Tax Policy Center. Prior to the 2001 Bush Tax Act, the beginning of the hike in the estate tax exemption, 52,000 estates paid the tax in 2000 when the exemption was $675,000. It was estimated that for deaths occurring in 2017, less than 11,500 estates would have to file an estate tax return, and of those only 5,500 or so will end up owing any tax at all. Those numbers dropped sharply under the new law to 1,800 or so for deaths occurring in 2018.