- Dennis Fordham
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Estate Planning: Expanded estate and gift tax exemptions
The federal estate tax exemption has effectively been doubled to more than $11 million in 2018. The exemption adjusts each year for inflation through 2025.
In 2026, unless new law is enacted that continues the 2017 Tax Act, it sunsets and the federal estate tax exemption returns to the prior exemption as indexed upwards for inflation using an adjusted Consumer Price Index; just over $5.5 million in 2017.
With a married couple, the $11 million federal estate tax exemption becomes $22 million from 2018 through 2025.
Thus, estates under $11 million for single persons, and estates under $22 million for married persons who die before Jan. 1, 2026, will not owe the Internal Revenue Service any federal estate tax.
Even though such estates do not owe any federal estate tax, the beneficiaries of these estates still receive an adjusted income tax basis equal to the appraised date of death value of all assets in the estate, excluding tax deferred retirement accounts.
The so-called “stepped-up basis” is a significant tax benefit enjoyed by beneficiaries who inherit assets that have appreciated over the life of the deceased former owner.
With a stepped-up basis capital gains tax is avoided with respect to the appreciation that occurred while the decedent owned the asset prior to death.
For example, consider a married couple who purchased their home in 1985 for $100,000. By the time the surviving spouse dies in 2020, their residence has appreciated in value to $400,000.
The parents’ children who inherit the residence receive a stepped-up basis of $400,000, provided it is substantiated by a qualified appraisal. When the children sell the residence they will only owe any capital gains tax if – and only to the extent that – the residence sells above the $400,000 basis.
The $11 million amount of the federal estate and gift tax exemption amount is not guaranteed to continue after 2025.
Anyone with a large estate that would thereafter become subject to federal estate tax were they to die after 2025 – presuming the exemption reverts to the current $5.5 million exemption – may want to consider substantial gifting prior to 2026 in order to use their unified federal estate and gift tax exemption while it lasts.
The gift tax annual exclusion amount has increased from $14,000 (2017) to $15,000 (2018).
Thus, persons can individually gift up to a total of $15,000, and married person together can gift up to a total of $30,000, in assets, in a given tax year, to any one individual – other than their spouse (who is covered by the unlimited interspousal exemption) – without having to file a federal gift tax return and without using any of their eleven million dollar lifetime unified federal estate and gift tax exemption amount.
While the federal estate tax only affects a very tiny fraction of the United States population, it is reassuring to see that the allowance for the stepped-up basis, which depends on the federal estate tax regime, is preserved. The capital gains tax, after all, affects everyone who sells appreciated assets.
Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and 707-263-3235. His Web site is www.DennisFordhamLaw.com.