On December 22nd, President Trump signed the Tax Cuts and Jobs Act of 2017 (hereafter "the Act") into law which affected nearly all aspects of the Internal Revenue Code. While the president was not able to totally fulfill his campaign promise to completely eliminate the federal estate tax, the Act effectively increased the threshold so high that only the very richest of Americans would be subject to its provisions.
Under pre-Act law, the first $5 million (adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax, known as the "basic exclusion amount". For estates of individuals dying in 2018 or for gifts made in 2018, the basic exclusion amount was $5.6 million ($11.2 million for a married couple). Basic exclusion amount means that the decedent could leave $5.6 million to heirs and pay no federal estate or gift tax.
Under the new law, the basis exclusion amount is now DOUBLED from $5 million to $10 million (still adjusted for inflation in years after 2011). Now, for estates of individuals dying in 2018 or for gifts made in 2017, the basic exclusion amount is $11.2 million ($22.4 million for a married couple). The Congressional Joint Committee on Taxation estimates that the number of taxable estates would drop from 5,000 under pre-Act law to 1,800 under the Tax Cuts and Jobs Act of 2017.
The annual gift tax exclusion amount for 2018 is $15,000.00 (up from $14,000.00 in 2017). This annual exclusion amount is how much an individual can give to any number of individuals without diminishing the basic exclusion amount. For example, if an individual makes gifts in excess of the exclusion amount year after year, these excesses are recorded on annual Form 709 gift tax returns. When the individual dies and it is time to calculate any potential federal estate tax liability, that $11.2 million basic exclusion amount is decreased by the amounts over the annual exclusion limit recorded on a lifetime of gift tax returns. If the new basic exclusion amount is less than the gross value of the estate, that individual's estate will be subject to the federal estate tax.
If a widowing spouse still wishes to take advantage of the deceased spouse's basic exclusion amount, it is still necessary for the deceased spouse's personal representative to file a Form 706 Estate Tax Return to elect to transfer the unused amount (after reducing for gift tax excesses) to the surviving spouse. This "portability" is not automatic and Form 706 must be filed to add the deceased spouse's unused exclusion amount ("DSUE") to the surviving spouse. Otherwise, the surviving spouse's basic exclusion amount will remain at $11.2 million (if he or she dies in 2018) which could have significant tax implications for wealthy estates. If the "portability" election is made, the surviving spouse may be able to shield up to $22.4 million for 2018 from federal estate tax liability.