The Estate Tax
In 2001, Congress passed a law that raised the amount that could pass without tax, increasing it in steps from $675,000 in 2001, to $3.5 million in 2009. Then, in 2010, the estate tax was repealed for one year only. However, late in 2010, Congress reinstated the estate tax law with TRA 2010. The law made three major changes. These changes involved the applicable exclusion amount, the tax rate, and a new portability provision. TRA 2010 set the amount that could pass without tax at $5 million (adjusted for inflation) per person for 2010-2012.
But, TRA 2010 was temporary and these changes were set to expire at the end of 2012. After TRA 2010’s expiration, the amount that could be passed free from tax would have gone back down to $1 million.
However, Congress passed another law: ATRA. This law repealed the expiration provision in TRA 2010, thus setting the exclusion to $5 million (inflation adjusted) for estate, gift, and generation-skipping purposes. The rate is capped at 40%.
In late 2017, Congress passed yet another tax law, which doubled the exemption to $10 million (adjusted for inflation from the 2011 base year). However, after 2025, that law “sunsets” or expires, and the law reverts to the prior law’s “permanent” $5 million exemption (adjusted for inflation from the base year of 2011).
Estate Tax Exclusion
As you know, not everyone’s assets are subject to the estate tax. Each person gets what’s called an “estate tax exclusion.” This is the amount of property that can be passed to your heirs and beneficiaries free of the estate tax at the time of your death. Under current law, the exclusion amount is temporarily set to $10 million, adjusted for inflation annually. With inflation running high, the exclusion in 2024 has been set at $13.61 million by the IRS (Rev. Proc. 2022-38).
Estate Tax Rate
If the value of your estate exceeds the applicable estate tax exclusion amount and ends up being subject to the estate tax, the top tax rate would be 40%.
The “portability” provision from TRA 2010 is also retained in current law. Portability allows a surviving spouse to use the unused estate tax exclusion amount of the first spouse to die.
This portability provision, also known as the “Deceased Spousal Unused Exclusion Amount,” can be used to shelter the assets of the surviving spouse. In order to take advantage of portability, the estate of the first spouse to die must file an estate tax return to elect portability. However, portability may not be wise when you have a blended family or want remarriage protection or asset protection for the surviving spouse. There are important deadlines associated with portability, so seeing a professional as soon as possible is important.
The Gift Tax
What happened to the gift tax under the new law?
The annual exclusion amount for the federal gift tax is at $16,000 for 2022, $17,000 for 2023, $18,000 for 2024 and it will continue to be adjusted for inflation.
This means that, this year, the maximum value of gifts you can give to a single recipient without filing a gift tax return and without tapping into your lifetime exclusion, (discussed below), is $18,000. Spouses can combine their annual gift tax exclusions and give gifts of up to $36,000 in value to each recipient this year.
What if your annual gifts to one recipient are more than the annual exclusion amount? You can use a portion of your estate tax exclusion to make lifetime gifts, but then your exclusion would not be available at death.
You can use your whole inflation adjusted exclusion during your lifetime. Of course, then you would not have any available at death.
What Should You Do Now?
As we have seen time and time again, the tax laws continue to change – sometimes benefiting us and sometimes not. Therefore, it is important to do regular reviews of your estate plan to make sure you take full advantage of all the tax savings opportunities available, to minimize taxes whenever possible. Also, if you have had changes in your family situation (births, divorces, marriages, remarriages, or deaths), an estate plan review is always prudent. Your estate plan needs to evolve and change with your life, addressing new goals and concerns you may have. If you are not sure whether a review meeting is necessary, feel free to give our office a call. We are happy to answer any questions you may have.
About Our Law Firm
Morris Hall, PLLC is devoted exclusively to estate planning. We are members of the American Academy of Estate Planning Attorneys. We offer guidance and advice to our clients in every area of estate planning. Our main office is located in Phoenix, with other locations throughout Arizona. We offer comprehensive and personalized estate planning consultations. Please call us at (602) 249-1328 or visit our contact us page.