Abstract: As a result of the current estate tax exemption amount
($12.92 million in 2023), many people are no longer concerned with federal
estate tax. This article points out that before 2011, a much smaller dollar amount
resulted in many people attempting to avoid estate tax. Now, because many
estates won’t be subject to estate tax, more planning can be devoted to saving income
taxes for heirs. A sidebar briefly looks at certain exclusions or
discounts.
Your estate plan: Don’t
forget about income tax planning
As a result of the current estate tax
exemption amount ($12.92 million in 2023), fewer people are concerned with
federal estate tax. Before 2011, a much smaller dollar amount resulted in many
people scrambling to avoid estate tax. Now, because many estates won’t be
subject to estate tax, more planning can be devoted to saving income taxes
for your heirs.
Note: The federal estate tax exclusion amount
is scheduled to sunset after 2025. Beginning in 2026, the amount is due to be
reduced to $5 million, adjusted for inflation, unless Congress acts to extend
the higher amount or institute a new amount.
In light
of the current large exemption amount, here are
some strategies to consider:
Gifts that use the annual exclusion
One benefit of using the gift tax annual
exclusion to make transfers during life is to save estate tax. This is because
both the transferred assets and any post-transfer appreciation generated by
those assets are removed from the donor’s estate.
Estate tax savings may not be an issue
because of the large estate exemption amount. Further, making an annual
exclusion transfer of appreciated property carries a potential income tax cost
because the recipient receives the donor’s basis upon transfer. If the heir
sells the gifted property, it could trigger capital gains tax that could be
significant. If there’s no concern that an estate will be subject to estate
tax, even if the gifted property grows in value, then the decision to make a
gift should be based on other factors.
Let’s say that a gift is made to help a
relative buy a home. Depending on the circumstances, using appreciated property
to make the gift may not be prudent from a tax perspective. Instead, if the
appreciated property is held until the donor’s death, under current law, the
heir recipient would get a step-up in basis that would wipe out the capital
gains tax.
Spouse’s estate
Years ago, spouses often undertook
complicated strategies to equalize their estates so that each could take
advantage of the estate tax exemption amount, perhaps with a two-trust
plan. “Portability,” or the ability to
apply the decedent’s unused exclusion amount to the surviving spouse’s
transfers during life and at death, became effective for estates of decedents
that died after 2010. If elected, portability allows the surviving spouse to
apply the unused portion of a decedent’s applicable exclusion amount (the
deceased spousal unused exclusion amount) as calculated in the year of the
decedent’s death. This gives married couples more flexibility in deciding how
to use their exclusion amounts. Bear in mind, though, that portability is a
federal estate tax concept. Generally,
those states that impose an estate tax don’t recognize portability. Thus, if
you may be subject to estate tax at the state level you should be sure to plan
accordingly.
Contact us to discuss these strategies and
how they relate to your estate plan.
Sidebar: Estate exclusions or valuation discounts: Still
good strategies?
Some estate exclusion or valuation discount strategies to
avoid inclusion of property in an estate may no longer be worth pursuing. For example, the special use valuation of qualified real
property in a business based on the property’s actual use, rather than the
highest and best use, may save only a small amount of estate tax. You may
achieve a better estate tax outcome by having the property included in the
estate or not qualify for valuation discounts so that the property receives a
step-up in basis.