The Internal Revenue Service announced increases in the estate and gift tax limits in 2019. These new limits, that were adjusted for inflation, should reduce the estate tax burden for families.
The estate and gift tax exemption will rise from $11.18 million to $11.4 million. This allows an individual to leave $11.4 million to heirs without incurring any federal estate tax or gift tax. A married couple will be able to protect $22.8 million.
Doubling the exemption amount from a base level of $5 million per person reduced the number of taxable estates. In 2018, there were approximately 1,890 taxable estates. By comparison, there were 4,687 taxable estates in 2017 when there was a base $5 million exemption. There were 52,000 taxable estates in 2000 when the exemption was $675,000.
Wealthy taxpayers will continue to decrease their tax liability by implementing wealth transfer strategies to reduce their estates and avoid the 40 percent federal estate tax. Couples who used up their exemption now have another $440,000 of exemption value that may be passed on without being taxed.
Protecting $22.8 million per couple, however, is not absolute. The unlimited marital deduction allows a spouse to leave all or part of their assets to their surviving spouse without risk of federal estate tax liability. Using a late spouse’s unused exemption requires an election of this exemption on the tax return of the first spouse who died. This strategy, known as portability, must be used correctly or a spouse may have an unexpected tax liability.
The annual gift exclusion will continue to be $15,000. A taxpayer can give $15,000 to an unrestricted number of recipients. Both spouses can each make a $15,000 gift. For example, a couple can gift $15,000 to each of their four grandchildren for a total of $120,000. Lifetime gifts above the annual exclusion amount are counted as part of the $11.4 million combined estate and gift tax exemption.
Taxpayers should also be aware of Minnesota’s estate tax rules. An attorney can help with this planning and assure that taxpayers pursue valid exclusions.