Understanding Estate Exemption Rules

Maintaining an updated estate plan is among the most important things you can do for your heirs. Thoughtful planning can minimize income, gift, and estate taxes. A good place to start is to understand the estate exemption rules. The federal estate exemption is the amount of assets the government allows you to have at death without imposing an estate tax. The Tax Cuts and Jobs Act of 2017 increased the exemption to $10 million, with adjustments for inflation until 2025.

After 2025, the exemption reverts to $5 million adjusted for inflation. For 2023, the estate and gift tax exemption is $12.92 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 $25.84 million without owing estate tax.

Couples and their advisors must be diligent in ensuring they get the benefits of portability since it is no longer automatic. The IRS issued rules concerning the requirements for electing the portability of a deceased spouse’s unused exemption amount. There still exists an unlimited marital deduction that 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 owes no 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.

With 2025 fast approaching, there could be more changes on the horizon as many of the provisions in the Tax Cuts and Jobs Act of 2017 possibly expire. Depending on the political party in power, you could see estate exemptions rolled back considerably. As recently as 2020, President Biden proposed rolling back the estate exemption to 2009 levels.   

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