Estate Planning in the Current Environment
July 18, 2022
By: Robert G. Tweel and Rebecca G. M. Krehbiel
Since the changes to the estate, gift, and generation skipping taxes went into effect in the Tax Cuts and Jobs Act of 2017 (“Tax Act”), advisers and clients have been working to take maximum advantage of the benefits, many of which will sunset at the end of 2025 without further legislative action.
The Tax Act doubled the estate, gift, and generation skipping tax exemptions. In 2022, the estate tax exemption is $12,060,000 per person. This high exemption provides significant relief for high-net-worth individuals and families with valuable business interests. Unfortunately, this increased exemption is currently scheduled to sunset at the end of 2025. The sunset provision adds a layer of uncertainty to planning, as no one can predict what will happen to the exemption in 2025 or beyond. In addition to the increase in the estate, gift, and generation skipping tax exemptions, the annual gift tax exclusion has been increased to $16,000 for 2022. Thus, in 2022, a donor can make gifts of up to $16,000 per beneficiary without eating into the donor’s $12,060,000 estate and gift tax exemption.
The estate tax provisions left untouched by the Tax Act are also significant in light of the increased exemption. The Tax Act maintained the “portability” of the estate tax exemption for married couples. Consequently, a surviving spouse can use the deceased spouse’s unused exemption at the surviving spouse’s death, which effectively allows an exemption of $24.12 Million per couple for 2022. Notably, however, the generation skipping tax exemption is still non-portable between spouses. Thus, any generation skipping tax exemption left unused at a decedent’s death cannot be used later by a surviving spouse.
To elect portability, the Executor of a decedent’s estate must file a federal estate tax return within nine months of the decedent’s death. There is an automatic six-month extension which allows for timely filing of an estate tax return within fifteen months of the decedent’s death. Even if the extended deadline is missed, the IRS in Rev. Proc. 2022-34 recently extended late-filing relief to allow taxpayers up to five years from the date of death to file an estate tax return for portability purposes. Because of the high exemption amounts prior to the 2025 sunset, the portability election can be an extremely important planning tool for families whose loved ones have passed in recent years.
The basis “step-up” at death is also an important advantage to keep in mind for planning purposes. This step-up in basis allows the cost basis of assets included in a decedent’s estate to be adjusted to the fair market value of those assets as of the decedent’s death. Since, with the increased exemption, more assets can be included in a decedent’s estate without incurring estate tax, this basis step-up allows more assets to pass to younger generations without built-in capital gain.
How does all of this affect you? You should review your estate plan, as the increase in exemption through 2025 provides many new planning opportunities for both high net worth families and those with more modest assets. While there is always uncertainty as to how Congress might change the estate tax exemption further, individuals or married couples with net worth greater than approximately $12 Million (roughly the current exemption amount), should be especially sure their estate plan maximizes the wealth that can pass to younger generations free of estate and generation skipping taxes. For example, there are gifting techniques during life that can use the exemption while it is still high.
For individuals and families with net worth below the exemption amount, your current estate plan might be overly complex. There are now opportunities to simplify your plan to ensure assets are included in your estate and on the estate of the surviving spouse so that the basis of those assets can be adjusted at each death. Taking advantage of this step-up in basis and inclusion in the estate of the surviving spouse is increasingly important with such a high exemption amount.
Other opportunities for maximizing the benefits of the Tax Act exist outside basic estate planning. For example, if you are a beneficiary of a trust that was created when there was a lower exemption amount, you should review the trust with an attorney. Depending on the structure of the trust, there may be opportunities to maximize the basis step-up of the trust assets on your death or possibly to terminate the trust. Such actions, however, should be done cautiously and with the advice of counsel to ensure no adverse generation skipping tax consequences are incurred as a result.
If you would like to discuss the planning opportunities available to you and your family in the current environment, please do not hesitate to reach out to a member of Jackson Kelly’s tax group. We can help you analyze your particular situation to determine what changes, if any, make sense.