On Dec. 22, President Donald Trump signed the Tax Cuts and Jobs Act (the Act), marking the most significant changes in federal tax law in 32 years. The Act makes sweeping changes for both individuals and corporations, and doubles the amount of the federal estate and gift tax basic exclusion amount (the exclusion). The focus of this article is to explore the impact of the increase on the exclusion on estate administration and planning going forward.
Estate, Gift and Generation-Skipping Tax Changes in the Act
The exclusion amount for estate, gift and generation-skipping tax purposes was increased from $5 million to $10 million, as indexed for cost-of-living adjustment starting from 2010. Those cost-of-living adjustments had resulted in a 2017 exclusion of $5.49 million, which was scheduled to increase to $5.6 million for 2018. The result is that for 2018, the exclusion will be $11.2 million per person ($22.4 million for married couples).
The increase in the exclusion only applies to estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026, and to gifts made during that period. The provision then sunsets in 2026, going back to $5 million per person, indexed for cost of living.
Impact on Estate Administration
Since 1997, the exclusion has increased substantially, while the estate tax rate has fallen. The effect of these changes has been to dramatically reduce the number of estate tax returns filed annually, as well as the amount of dollars raised by the tax. In the years since the exclusion was increased to $5 million, approximately 60% of the returns filed showed estate values under $10 million, so we can expect to see the number of taxable returns to drop at least 60%. However, these returns only accounted for about 14% of estate tax paid during this period. So while the number of returns that need to be filed will decrease substantially, the amount of revenue generated by the estate tax will not.
The decrease in the number of returns that will actually be filed may not be as large as these statistics would indicate. This is because the exclusion is portable between spouses. To the extent the first spouse to die does not utilize his or her exclusion, the surviving spouse can use it. But in order to claim the first spouse’s unused exclusion, an election must be made on a timely filed estate tax return. So a return will often be filed for the first spouse even when the size of the estate is not over the filing requirement.
This is especially true in light of the sunset provision in the Act. If the first spouse dies before Jan. 1, 2026, his or her exclusion will be based on the $10 million basic exclusion and can be preserved for the surviving spouse, even if the second death is after that date, when the $5 million basic exclusion returns. The surviving spouse will be entitled to the first spouse’s larger exclusion, plus his or her own smaller exclusion.