Leading up to the passage of the Tax Cuts and Jobs Act, there was considerable discussion about repealing the estate and gift tax. That didn’t happen! But Congress did double the value of an estate that is excluded from being taxed, and as a result, fewer estates will be subject to the 40% estate tax, and even those in excess of the excluded amount will pay less tax.
Exemption Amount and Filing Requirements
The exclusion was previously raised to $5 million in 2010 and is inflation adjusted, so for 2017, the exclusion was $5.49 million. The Act increased the exclusion to $10 million for 2018, but inflation-adjusted it from 2010 and modified the way the inflation rate is calculated, so the exclusion for 2018 is $11,180,000. If the value of an estate exceeds the exclusion amount, a Form 706—an Estate Tax Return—is required to be filed.
A surviving spouse generally inherits the estate of the deceased spouse, so when the surviving spouse dies, their estate will include the value of all of their property still owned at that spouse’s death, whereas the estate of the first to die generally only includes half of their combined estate. That is why Congress created the portability provision several years ago, which allows the executor of the deceased spouse’s estate to transfer any unused estate tax exclusion from the deceased spouse to the surviving spouse. That provision still applies. However, a Form 706 must be filed to take advantage of the portability provision. Form 706 returns often require appraisals of the deceased spouse’s assets and are complicated and time consuming.
As a result, when an estate tax return isn’t required because the estate’s value is below the exclusion amount, the surviving spouse generally doesn’t want to go through the process and expense of having the Form 706 completed and filed, thereby forfeiting the portability of the deceased spouse’s unused exclusion. This is generally the appropriate course of action for small estates. However, there are risks, as Congress could reduce the exclusion in the future, or the surviving spouse could hit the lotto big or even receive an inheritance that could cause his or her estate to be taxed. If those occur, the beneficiaries may be asking why portability was not elected. That places a tax preparer in a difficult position, so be understanding if you are requested to sign a statement indicating that you opted out of the portability election so the tax preparer doesn’t have any potential liability with the beneficiaries.
The Act retains the annual gift tax exclusion, which for 2018 is $15,000 per gift recipient.
As an aside to the estate tax filing issue, this is a reminder to periodically review your named beneficiaries for your retirement accounts, brokerage and bank accounts, real estate, and other property. Deaths, divorce, marriage, and other such issues can change whom you want to inherit your estate.