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The American Taxpayer Relief Act made permanent changes to the federal estate and gift tax rules. Here are the basics:

  • The federal estate tax exemption is $11.18 million for estates of individuals who die in 2018 (up from $5.49 in 2017). A 40% tax rate applies to the value of an estate in excess of the $11.18 million exemption (the 40% rate is lower than the maximum estate tax rate that was in place a few years ago).
  • For married couples, if one spouse dies, any unused federal estate tax exemption can be left to the surviving spouse. In other words, unused exemptions of married individuals are “portable.”
  • The federal gift tax exemption is also set at $11.18 million for 2018. Gifts in excess of $11.18 million exemption will be taxed at 40% in 2018 (lower than the maximum gift tax rate that was in place a few years ago).

This is all good news, but your estate plan may need an update to take advantage. Here is what married couples need to know.

Married Couples with a Joint Estate of Less than $11.18 Million

Thanks to current tax law, there won’t be any federal estate tax due if your joint estate is less than $11.18 million — even if both you and your spouse die in 2018. Therefore, you can leave everything to your children and other relatives and loved ones without having to worry about the federal estate tax.

However, that does not necessarily mean you don’t need an estate plan. If you have minor children, you need a will to appoint someone to be their guardian if you die. The same is true if you want to leave specific assets to specific individuals. If you are concerned about leaving money to a spouse or other individual who is not financially astute, you might want to set up one or more trusts to manage assets they will inherit.

Married Couples with a Joint Estate of between $11.18 and $22.36 Million

Couples in this wealth category can benefit greatly from the fact that unused federal estate tax exemptions of married individuals who die in 2018 are “portable” under the tax law. So if you die before your mate, you can direct the executor of your estate to give any unused exemption to your surviving spouse. If your spouse dies before you, he or she can do the same. Just make sure your estate planning documents are amended to say so. Here are two examples to illustrate how the portable estate tax exemption deal can work to your advantage.

Portable Exemption in Action

Example 1: Gail is a U.S. citizen who dies in 2018 with a $6 million estate. Thanks to the $11.18 million federal estate tax exemption, she can leave the entire $6 million to her adult children without any federal estate tax hit. The executor of Gail’s estate can then elect to pass along Gail’s unused $5.18 million exemption to her husband who has a $15 million estate. If her husband dies in 2018, he can leave his entire $15 million estate to the children without any federal estate tax hit (thanks to his $11.18 million exemption plus Gail’s unused $5.18 million exemption).

Example 2: Assume the same basic facts as in the preceding example, except this time Gail simply leaves her entire $6 million estate to her husband without any federal estate tax hit and without using up any of her $11.18 million exemption in 2018 (since her husband is a U.S. citizen, this can be done by taking advantage of the unlimited marital deduction privilege). The executor of Gail’s estate then elects to pass along Gail’s unused $5.18 million exemption to her husband. If her husband dies in 2018, his estate will have a $22.36 million exemption to play with (his $11.18 million plus Gail’s unused $11.18 million). So Gail’s husband could leave his entire estate to the children without any federal estate tax hit.

Excerpts from an article in the EHTC e-newsletter, May 30, 2018.

If you have any questions on estate planning, please call Karen L. Stewart, Attorney and Counselor at (248) 735-0900.

For more information, please see my website, www.customestateplans.com.