January 27, 2020

By Vicki Wind

Individuals with large estates should act now to take advantage of a 2017 law that reduces estate taxes upon death.

Estate taxes are levied on the assets transferred at your death, but only if the value of your estate is above a specified threshold, known as the “basic exclusion amount” (BEA). In general, gifts made during your lifetime are combined with the value of the assets at death to determine a decedent’s total estate. Gift and estate taxes are calculated on these transfers, and any tax due is determined after applying a credit based on the applicable exclusion amount. The Tax Cuts and Jobs Act of 2017 increased the BEA from around $5 million to $10 million per person (adjusted for inflation, it is $11,580,000 in 2020), but only until 2025. After 2025, the BEA will be scaled back to the 2017 amount, unless Congress acts to make the current BEA permanent.

So, if you have an estate large enough, how can you avoid paying this tax if you die after 2025? Dying with a $10 million estate in 2025 would allow you to avoid having a tax imposed on your estate, but if you are the unfortunate soul who dies just days into 2026, you may have a much larger tax burden placed on your surviving family members.

Fortunately, the IRS recently enacted final regulations that protect you when the total gifts made before December 31, 2025, exceed the BEA after January 1, 2026. The regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

The regulations were enacted to avoid the unfair situation that otherwise would eliminate the increase in the BEA during the time period between December 31, 2017, and January 1, 2026. In such a case, the increased BEA is a “use or lose” benefit and is available to a decedent who survives the increased BEA period only to the extent the decedent “used” it by making gifts during the increased BEA period. The regulation is based on gifts actually made, and is not applicable to a decedent who did not make gifts in excess of the date of death BEA.

If your estate could exceed $5 million (or $10 million when combined with your spouse’s assets) in 2025, you should consider making large gifts in order to reduce your estate tax exposure. You should review your lifetime gifts in 2025 to utilize the maximum exclusion amount available at that time. If you do not do so, you will be limited to the BEA available in the year of death. In fact, it may be helpful to set up a schedule beginning now to make gifts each year through 2025, to ensure that the increased BEA will apply.

Contact Vicki Wind or Joe Price at (816) 931-2700 for more information.