Estate and Gift Tax Planning Considerations for Estates between $7 - $13 Million

In this ever-changing estate planning environment, taxpayers should revisit estate plans regularly to confirm needs and goals are met, while keeping a keen eye on the horizon for scheduled future tax changes.

Current Law and Upcoming Changes

Under the Tax Cuts and Jobs Act of 2017, the estate and gift tax exemption doubled, and this exemption has since been adjusted annually for inflation. Taxpayers have benefited from this higher estate tax exemption, and many tax-related estate planning considerations may have been set aside.

In 2023, the exemption was $12.92 million per individual, and with the inflation adjustment for 2024, the exemption is currently $13.61 million. These exemption amounts mean many individuals and families have not addressed tax and estate planning because their anticipated estates are under the estate tax filing threshold.

However, the current estate and gift tax exemption is set to sunset back to old law at the end of December 31, 2025. Under prior law, the exemption was $5 million per individual. After being adjusted for inflation, the anticipated exemption amount may be between $7 and $7.25 million beginning on January 1, 2026.

With the upcoming change, now is the time to revisit estate plans. Individuals and families are strongly encouraged to seek the advice of tax professionals to ensure estate plans still align with desired goals while maintaining the flexibility that is key in a potentially changing exemption environment.

Planning Opportunities and Considerations Today

With the sunset provisions on the horizon, the difference between where the exemption will be on January 1, 2026, and where the exemption is today is sometimes referred to as the “bonus” exemption.

A taxpayer uses their exemption from the bottom up, so if we expect the exemption to drop to $7 million in 2026, then a taxpayer must use all of their $7 million exemption before they begin to use their “bonus” exemption amount.

Taxpayers are not allowed to gift assets using the bonus exemption unless they have fully used the amount prior to the bonus. If a married couple is considering a $14 million gift today, they will have minimal or no exemption available beginning on January 1, 2026, because each of them would have used their full exemption.

Depending on the size of your estate and any anticipated appreciation, it may not be beneficial to transfer assets today for income tax purposes. Property included in the decedent’s estate receives a new tax basis equal to its fair market value on the decedent's death, which often results in a “step-up” in basis. This can significantly reduce capital gain taxes incurred if beneficiaries later sell the inherited assets. When taxpayers gift the assets during their lifetime, however, the beneficiaries receive the donor’s adjusted basis rather than a stepped-up tax basis. This should be considered if you anticipate your estate to be under the exemption at your passing.

Portability and Other Estate Tax Issues

If a decedent’s estate is over the exemption amount, an estate tax return must be filed with the IRS and is due nine months from the decedent’s date of death. An automatic six-month extension can be made if additional time is needed to file the estate tax return.

An estate’s executor may decide to file an estate tax return even though the estate’s assets fall under the estate tax exemption, solely for the purpose of having the deceased spouse’s unused exemption ported over to the surviving spouse. If an estate tax return is filed solely for portability purposes, the executor has five years from the decedent’s death to file an estate tax return, per Rev. Proc. 2022-32. An estate tax return filed solely for portability purposes was previously required to be filed within two years of death.

Rev. Proc. 2022-32 is generally available if the decedent was survived by a spouse and the decedent was a citizen or resident of the United States on the date of death. Under current law, any unused estate tax exemption amount made portable to a surviving spouse is not adjusted by future changes in the estate tax exemption. If an executor decided that they did not want to file a portability estate tax return under the previous rules, they may want to reconsider now that they have five years to file.

There are some states that impose separate state-level estate taxes, and those states have separate state-specific exemption amounts different from the federal exemption amount. There are currently no states that provide the portability of a state’s estate tax exemption. It is important to note that state-level estate tax returns can be due even if a federal estate tax return is not required.

What You Can Do Now with Your Estate and Gift Tax Planning

Now is the right time to revisit your current estate plan to ensure everything is up to date and that it provides for portability and flexibility with any potential changes to the exemption amount. Taxpayers may want to prepare themselves to make changes to their estate plan if it appears the sunset provisions will take effect on January 1, 2026. Our team can help you determine what, if any, actions should be taken today to ensure your estate plan aligns with your goals and objectives.