Understanding Estate Exemption Rules

At the beginning of 2013, Congress made the estate tax exemption permanent at $5 million per person, the 2012 rate, but adjusted the amount for inflation each year going forward. The Tax Cuts and Jobs Act of 2017 further increased the exemption to $10 million with adjustments for inflation until 2025. 

After 2025, the exemption reverts back to $5 million adjusted for inflation. For 2021, the estate and gift tax exemption stands at $11.7 million per person. Congress also made another very popular component of the estate tax law, called “portability,” permanent. Portability allows spouses to combine their estate tax exemptions, effectively letting married couples give away or leave $23.4 million without owing estate tax.

Couples and their advisors must be diligent in making sure they get the benefits of portability since it is no longer automatic. The IRS issued rules concerning the requirements for electing portability of a deceased spouse’s unused exemption amount. There still exists an unlimited marital deduction which allows you to leave all or part of your assets to your surviving spouse free of the federal estate tax. However, to use your late spouse’s unused exemption, you must elect it on the estate tax return of the first spouse to die. This rule applies even if the first spouse doesn’t owe any estate tax. 

Generally, an estate tax return is due nine months after the date of death. A six-month extension is available if requested prior to the due date. This makes it imperative that high-net-worth people educate themselves on what portability is and how to elect it. Failure to follow the rules may result in considerably higher estate taxes.

There has been a lot of activity in this area of the law over the last decade and with a new president in office, there could be more changes on the horizon. President Biden’s tax plan calls for rolling back the exemption to 2009 levels, although it is unclear if he will have the votes to change the law at this time.

If you haven’t had your current estate strategy reviewed by your attorney in the last five years, it’s probably time for an estate checkup. 

Sources: 

• IRS Publication 559 Survivors, Executors, and Administrators
• Tax Foundation FISCAL FACT No. 730 Oct. 2020 Details and Analysis of Democratic Presidential Nominee Biden’s Tax Proposals