Plan Now for Sunsetting Estate & Gift Tax Exemption

As we’ve previously discussed, portability is an important feature of an estate plan. Portability allows the surviving spouse to die to “save” any of their predeceased spouse’s unused federal estate and gift exemption amount. A federal tax of 40% is imposed on each dollar that exceeds a decedent’s federal estate and gift exemption amount.

The current exemption amount, however, will sunset December 31, 2025, and revert back to the 2017 limits, adjusted for inflation, at about $7 million. So, those whose estates currently fall below the exemption amount should plan now for the new threshold.

The 2024 federal estate and gift exemption is $13.61 million per person or $27.22 million for a married couple. Portability allows a surviving spouse to preserve their spouse’s unused exemption for their own use. The surviving spouse can only preserve their predeceased spouse’s unused exemption by making an affirmative election on a federal estate tax return, even if the estate is under the federal estate and gift exemption and would otherwise not need to file a federal estate tax return.

If the surviving spouse’s assets (taking into account taxable gifts) exceeds the federal estate and gift exemption, then they are taxed on the excess.

Assume a spouse dies in 2023 with an unused federal estate and gift exemption of $12.92 million. Assume the surviving spouse dies in 2026, when the exemption is $7 million, with an $8 million estate. The surviving spouse’s estate will be taxed on the excess $1 million at a rate of 40%. If the surviving spouse had preserved their spouse’s unused federal estate and gift exemption, they would have no federal estate tax[1] on the excess.

The IRS allows for the late filing of an estate tax return to preserve the unused federal estate and gift exemption up to five years from the date the first spouse died, if the only reason the estate needed to file the estate tax return was to elect to preserve the unused federal estate and gift exemption.

Now is a good time to speak to your trusts and estates attorney to prepare for the new exemption amount.

[1] Portability does not apply to state estate taxes.