Estate Planning

The combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption was increased for inflation and presents several estate planning opportunities for taxpayers to consider.

For 2019, the exemption is as follows:

  • $11.58 million per individual
  • $23.16 million for a married couple

The gift and estate tax exemptions remain unified so any use of the gift tax exemption during the taxpayer’s lifetime would decrease the estate tax exemption available at death. The tax rate for all three taxes remains at a maximum of 40%.

Estate Exemption Reductions

The exemption amount is set to revert to 2017 levels after 2025, about half of their current levels. This means you have roughly seven more years to utilize the increased exemption. There’s also no guarantee that a future administration won’t reduce the exemption amounts even lower than the proposed amounts.

The scheduled reversion raises possible, but unlikely, claw-back concerns that should be considered.

Planning Opportunities

Taxpayers with estates valued at more than $6 million and married couples with estates valued at more than $12 million will have some factors to consider.

Estate Exemption

Married taxpayers with estates between $10 million and $24 million will typically have an estate plan that includes a provision in the living trust to fund a so-called bypass trust. This trust would utilize the remaining lifetime exemption of the deceased spouse, while giving the surviving spouse access to the funds in the trust. When the surviving spouse passes away, the assets of the bypass trust aren’t included in the surviving spouse’s estate.

With the current estate exemption, married taxpayers may want to consider including a provision in their revocable trusts or wills that would give them the flexibility to leave their assets to a trust that qualifies for the marital deduction. Upon the surviving spouse’s death, the entire trust is taxed in their estate. This could result in getting a second basis step up for the assets taxed in the surviving spouse’s estate.

One should also watch the community property state rules. The use of portability in this transaction allows the first-to-die exemption to be transferred to the surviving spouse; that exemption doesn’t get reduced until 2025. Therefore, there’s also an ability to use the first-to-die portability exemption without reduction, even though there could be a legislative reduction in the exemption.

Income Taxes—Wins and Losses

It’s important to understand the drawbacks associated with gifting assets. Gifted assets don’t receive a step-up in tax basis. This step-up is valuable for low basis assets that depreciate or will be sold. By keeping them as part of an estate, these assets will receive a step-up.

Most states conform to federal basis provisions. With state income taxes no longer deductible, taxpayers in high-taxed states such as California could see their federal and marginal tax rates be as high as 50% depending on the type of asset. The estate tax rate is 40%. Note that there might be an incentive to pay 40% estate tax rate to receive a 50% benefit.

Consideration must be given to the fact that capital gain rates could be substantially lower than estate tax rates, so a separate determination could be made. Certain trust planning could be done to help reduce the effect of income and estate taxes.

Estate Plan Flexibility and Considerations

With income and estate taxes seemingly in constant flux, providing flexibility in an estate plan could prove vital.

The increased exemption amounts were projected to reduce the number of estates subject to estate tax to around 40% of the past estate returns filed. While the increased exemption amounts changed the way individuals and families plan their estates, there are still many nontax issues to consider such as asset protection, guardianship of minor children, family business succession, and planning for loved ones with special needs.

Some states have responded to the federal tax law changes. If someone lives in a state that imposes its own significant estate tax, many traditional tax-reduction strategies will continue to be relevant on a state level.

More Resources


Article
New IRS guidance could provide significant tax savings for nongrantor trusts and estates.

Article
Tax reform may significantly affect tax strategies for estate planning. We look at key provisions—and opportunities—in our Alert.

Article
Learn how technology executives who derive a significant amount of their income from stock-based compensation can benefit from proactive tax planning.

Article
While initiating an estate plan can be intimidating for many reasons, it’s still important to have one in place. We give an overview of things to consider and ways to maintain your plan once it’s established.

Article
Individuals will need to consider the effects of President Trump’s tax reform in their 2017 income taxes.