The Tax Cuts and Jobs Act doubled the gift and estate tax basic exclusion amount and the GST exemption to $11.18 million in 2018 (indexed annually for inflation). The exclusion and exemption are $11.7 million in 2021. After 2025, the amounts are scheduled to revert to their level prior to 2018 and be cut by about one-half.
The portability feature is in effect for 2011 and later years.
This article summarizes the changes made to the federal gift and estate tax and the federal generation-skipping transfer (GST) tax under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act), the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), and the Tax Cuts and Jobs Act. A chart at the end of the discussion summarizes the effects of this law.
Estates of persons who died in 2010
The GST tax was also reinstated for 2010 with a $5 million exclusion, but with a tax rate of 0%.
The gift tax remained the same: a top rate of 35% and a $1 million exclusion.
Exclusions and top tax rates in 2011 and 2012
Exclusions and top tax rates in 2013 to 2017
Similarly, for 2013 to 2017, the GST tax exemption was $5 million (as indexed for inflation) per person ($5,490,000 in 2017); the GST tax rate for these years was 40%.
Exclusions and top tax rates in 2018 and later years
Similarly, the GST exemption is $11.18 million in 2018 (indexed annually for inflation). The exemption is $11.7 million in 2021. After 2025, the exemption is scheduled to revert to its level prior to 2018 and be cut by about one-half. The GST tax rate for these years is 40%.
Portability of gift and estate tax exclusion
Prior to the 2010 Tax Act, if a spouse died without having planned for his or her exclusion, the deceased spouse’s estate would have passed tax free to the surviving spouse under the unlimited marital deduction (assuming all assets passed to the surviving spouse), and the deceased spouse’s exclusion would be lost or “wasted.” The surviving spouse’s estate could then only transfer an amount equal to his or her own exclusion free from federal estate tax. To solve this dilemma, married couples typically set up what is commonly referred to as a credit shelter trust (or bypass trust) that sheltered or preserved the exclusion of the first spouse to die. Portability can achieve a similar result without the use of a credit shelter trust.
To use the exclusion portability, the estate of the first spouse to die must elect to use portability on the estate tax return. An estate tax return must be filed by the estate of the first spouse to die to use portability even if the return is not otherwise required to be filed.
Exclusion portability is available only from the last deceased spouse. The exclusion of the first spouse will be lost if the surviving spouse remarries and is predeceased by the second spouse. In other words, if the surviving spouse survives Spouse 1, the surviving spouse can use Spouse 1’s unused exclusion even if the surviving spouse marries Spouse 2. However, if Spouse 2 also predeceases the surviving spouse, the exclusion of Spouse 1 can no longer be used. However, the surviving spouse can then use the unused exclusion of Spouse 2.
Tip: The portability feature is available to the estate of a deceased spouse dying in 2011 and later to transfer the unused exclusion of the deceased spouse to the surviving spouse.
Caution: The portability feature applies only to the gift and estate tax; it does not apply to the GST tax. Without a trust, any unused GST tax exemption of the first spouse to die will be lost.
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