Federal estate and gift taxes account for only 0.7% of all federal revenue. Changes made in estate tax rules by the Tax Cuts and Jobs Act will keep this percentage low through 2025 (unless Congress changes the law before then). Even so, estate and gift taxes continue to be a concern to many wealthy individuals. One of the key issues is what happens to estate tax planning now when the law changes in 2025 (or earlier).

Present Estate Tax Rules

A federal estate tax return for a decedent's estate is required if the value of the estate exceeds a set amount. For 2019, the filing threshold is $11.4 million (Rev. Proc. 2018-57); for 2020, it is $11.58 million (Rev. Proc. 2019-44). The filing thresholds are the basic exclusion amount (BEA), which is adjusted annually for inflation. Estates below this amount are not subject to estate tax.

Even if an estate is required to file a return, it may not owe any tax. This is because of various deductions, credits, and "portability." Portability means that an estate of a decedent who is survived by a spouse can elect to pass on to that spouse any unused basic exclusion amount. This allows the surviving spouse's estate to use both his/her own BEA, plus the portion passed through portability (referred to as the deceased spousal unused exclusion, or DSUE).

Again, even though an estate is large enough to file an estate tax return, deductions may reduce or eliminate any estate tax owed. Deductions include:

• Marital deduction for property passing to a surviving spouse. There is no limit on this deduction amount. Thus, if the entire estate passes to a surviving spouse (outright or in an acceptable trust format), there is no taxable estate.
• Charitable deduction for property passing to a qualifying charity. Again, there is no limit on the amount of this deduction.
• Deduction for administrative expenses of the estate, including attorney's fees.
• Deduction for losses during estate administration.
• Deduction for state death taxes, with no dollar limit.

Even if there is a tentative tax because the estate has not been reduced to zero through the application of deductions, the tax can still be reduced or eliminated through credits, including:

• Unified credit, which is the translation of the basic exclusion amount into a credit. The unified credit is reduced by post-1976 taxable gifts that were untaxed because of using the basic exclusion amount during the decedent's lifetime.
• Credit for prior transfers, which applies if a transferee received property from a transferor who died within 10 years before, or 2 years after, the transferee. The credit is allowable for all or part of the federal estate tax paid by the transferor's estate for the transfer (depending on how many years earlier the transferor died).
• Foreign death taxes paid by a decedent who is a U.S. citizen or resident.

Present Gift Tax Rules

The gift tax rules were not impacted by the Tax Cuts and Jobs Act. Donors can give an amount annually to as many donees as desired without incurring gift tax. The annual exclusion amount for this purpose is $15,000 in 2019 (the same annual exclusion amount applies in 2020). However, any unused amount does not carry over to the next year.

Married persons can effectively double the annual exclusion amount by opting to split the gift. Doing so requires the filing of a gift tax return.

Gifts in excess of the annual exclusion amount are still tax free, up to the BEA for lifetime gifts. To the extent the basic exclusion amount is applied toward lifetime gifts, it is not available for estate tax purposes. For example, if an individual gives away $11.4 million in 2019 (the full amount of the BEA) and dies in 2020, the BEA available for the estate is $180,000 ($11.58 million BEA in 2020—$11.4 million used during life).

Under a special gift tax rule, substantial transfers can be made all at once to a beneficiary's account in a 529 education plan without using up any part of the basic exclusion amount for lifetime gifts. More specifically, gifts can be made up to five times the annual exclusion amount (e.g., $75,000 in 2019 and 2020). This acceleration rule effectively spreads the exclusion amount over five years, so no additional gifts to the same beneficiary can be made in the five-year period that are shielded by the annual exclusion amount. Amounts given under this five-year rule can be doubled where a spouse consents to split the gift.

Special gift tax rules apply for gifts to spouses who are not U.S. citizens or residents.

Anti-Clawback Protection

What happens if an individual takes advantage of the current BEA for lifetime gifts and then dies when the BEA for estate tax purposes has declined below that level? And what happens to a DSUE when the surviving spouse dies after the BEA declines? Final regulations (T.D. 9884, 11/26/19) make it clear that there will be no clawback of the tax benefit enjoyed with the higher BEA.

The BEA for estate taxes will not be lower than any gifts sheltered by the BEA during life (Reg. §20.2010-1(c)). The regulations contain this example: An individual gives $9 million in gifts, all of which is gift tax free because of the $11.4 million BEA applicable for the year of the gifts. Assume this person didn't make any other post-1976 taxable gifts. If the individual dies in 2026 when the BEA is $6.8 million (this is just an assumption; the dollar amount is unknown at this time), the BEA for the individual's estate is $9 million.

Similarly, say a predeceased spouse had an unused BEA of $11.4 million and a DSUE election was made. Subsequently the surviving spouse (who has not remarried or made any post-1976 taxable gifts) dies in 2026 when the BEA is $6.8 million. The total BEA for the estate of the surviving spouse is $18.2 million ($11.4 million DSUE + $6.8 million BEA at the time of the surviving spouse's death).

State Death Taxes

States can impose their own death taxes. Some states have an inheritance tax imposed on a beneficiary or transferee. Others have an estate tax. Locally:

• Connecticut has an estate tax, but those valued at $3.6 million or less for a decedent dying in 2019 (scheduled to be $5.1 million for a decedent dying in 2020) are exempt from the tax. Connecticut also has a gift tax.
• New Jersey has an inheritance tax. The estate tax was repealed for estates of decedents dying on or after Jan. 1, 2018.
• New York imposes an estate tax. The basic exclusion amount for a decedent dying in 2019 is $5,740,000 ($5,850,000 for a decedent dying in 2020).

Final Thought

Estate tax planning continues to be an important consideration for many individuals. Who knows how much property held today will appreciate by the time of death? Who knows what the federal and state laws will be in the future? Watch for developments.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company.