Estate and Gift Tax Planning Considerations for Estates between $6 - $12 Million

May 19, 2023
couple reviewing documents

The estate planning world is constantly changing, and this produces uncertainty for taxpayers. Strategic planning involves considering present law and planning for known changes in the future while also anticipating any potential surprises.

In this ever-changing estate planning environment, taxpayers should revisit estate plans regularly to confirm needs and goals are met, while keeping a keen eye on the horizon for scheduled future tax changes.

Current Law and Upcoming Changes

Under the Tax Cuts and Jobs Act of 2017, the estate and gift tax exemption was doubled, and this exemption has since been annually indexed for inflation. Taxpayers have benefited from this higher estate tax exemption, and many tax-related estate planning considerations may have been set aside.

In 2022, the exemption was $12.06 million per individual, and with the inflation adjustment for 2023, the exemption is currently $12.92 million. These exemption amounts mean many individuals and families have not addressed tax and estate planning because their anticipated estates are under the estate tax filing threshold.

However, the current estate and gift tax exemption is set to sunset back to old law at the end of December 31, 2025. Under prior law, the exemption was $5 million per individual. After being adjusted for inflation, the anticipated exemption amount may be between $6.5 and $7 million beginning on January 1, 2026. With the upcoming change, now is the time to revisit estate plans. Individuals and families are strongly encouraged to seek the advice of tax professionals to ensure estate plans still align with desired goals while maintaining the flexibility that is key in a potentially changing exemption environment.

Planning Opportunities and Considerations Today

With the sunset provisions on the horizon, the difference between where the exemption will be on January 1, 2026 and where the exemption is today is sometimes referred to as the “bonus” exemption. A taxpayer uses their exemption from the bottom up, so if we expect the exemption to drop to $7 million in 2026, then a taxpayer must use all of their $7 million exemption before they begin to use their “bonus” amount. Taxpayers are not allowed to gift assets using the bonus exemption unless they have fully used the amount prior to the bonus. If a married couple is considering a $7 million gift today, they will have minimal or no exemption available beginning on January 1, 2026 because each of them would have used their full exemption.

One popular exemption planning technique involves one spouse making a gift using their entire lifetime exemption available to them while leaving the other spouse’s exemption intact and available after the scheduled drop in the exemption. This would allow the same married couple to transfer up to $12.92 million today and still have one spouse’s lifetime exemption available in 2026 if the exemption sunsets.

Depending on the size of your estate and any anticipated appreciation, it may not be beneficial to transfer assets today for income tax purposes. Property included in the decedent’s estate receives a new tax basis equal to its fair market value on the decedent's death, which often results in a “step-up” in basis. This can significantly reduce capital gain taxes incurred if beneficiaries later sell the inherited assets. When taxpayers gift the assets during their lifetime, however, the beneficiaries receive the donor’s adjusted basis rather than a stepped-up tax basis. This should be considered if you anticipate your estate to be under the exemption at your passing.

Portability and Other Estate Tax Issues

If a decedent’s estate is over the exemption amount, an estate tax return must be filed with the IRS and is due nine months from the decedent’s date of death. An automatic six-month extension can be made if additional time is needed to file the estate tax return.

An estate’s executor may decide to file an estate tax return even though the estate’s assets fall under the estate tax exemption, solely for the purpose of having the deceased spouse’s unused exemption ported over to the surviving spouse. If an estate tax return is filed solely for portability purposes, the executor has five years from the decedent’s death to file an estate tax return, per Rev. Proc. 2022-32.  An estate tax return filed solely for portability purposes was previously required to be filed within two years of death.

Rev. Proc. 2022-32 is available for all deaths occurring after December 31, 2010. Under current law, any unused estate tax exemption amount made portable to a surviving spouse is not adjusted by future changes in the estate tax exemption. If an executor decided that they did not want to file a portability estate tax return under the previous rules, they may want to reconsider now that they have five years to file.

There are some states that impose separate state-level estate taxes, and those states have separate state-specific exemption amounts different from the federal exemption amount. There are currently no states that provide the portability of a state’s estate tax exemption. It is important to note that state-level estate tax returns can be due even if a federal estate tax return is not required.

What You Can Do Now with Your Estate and Gift Tax Planning

Now is the right time to revisit your current estate plan to ensure everything is up to date and that it provides for portability and flexibility for any potential changes to the exemption amount. Taxpayers may want to position themselves to be ready to make changes to their estate plan if it appears the sunset provisions will take effect on January 1, 2026. As the sunset date approaches, professional tax advisors may find they have limited time, meaning a best practice could be to plan for a drop in the exemption amount now rather than waiting until 2025.

Our team can help you determine what, if any, actions should be taken today to ensure your estate plan aligns with your goals and objectives.

Expand Full Article

We're Here to Help

We are here to help
From business growth to compliance and digital optimization, Eide Bailly is here to help you thrive and embrace opportunity.
Speak to our specialists