By Nancy Burner, Esq.
Federal and state funding of COVID-19 related relief will likely require major budget overhauls and could potentially change the estate and gift tax landscape.
On the federal level, the 2017 Tax Cuts and Jobs Act doubled the estate and gift tax exclusion from $5,000,000 to $10,000,000, as adjusted for inflation, for decedents passing away between 2018 and 2025. However, the increase in the exclusion amount is temporary and is scheduled to sunset on December 31, 2025 and revert back to $5,000,000 (adjusted for inflation).
Currently, the federal 2020 lifetime exclusion amount is $11,580,000 per person, which can be utilized to transfer assets during life or upon death, free of federal estate or gift tax. In New York, the current estate tax exclusion is $5,850,000. New York does not impose a gift tax, although gifts made within three years of death are brought back into the estate for estate tax purposes.
Portability on the federal level allows a surviving spouse to use the deceased spouse’s unused federal lifetime exclusion. Therefore, if the first spouse to die has not fully utilized his or her federal estate tax exclusion, the unused portion, called the “DSUE amount,” can be transferred to the surviving spouse. The surviving spouse’s exclusion then becomes the sum of his or her own exclusion plus the DSUE amount.
To take advantage of the DSUE amount, a timely filed federal estate tax return must be filed within 9 months from the deceased spouse’s date of death, or within 15 months pursuant to an extension request. Many surviving spouses may not be aware of this requirement or fail to see how filing a return would be beneficial at the time of the first spouse’s death with the current exclusion amount being so high. If ignored, upon the death of the surviving spouse, his or her estate is unable to utilize the DSUE amount unless other specific actions are taken. New York State does not currently have portability.
With the looming sunset, practitioners were concerned with what exclusion amount would be used to calculate the estate tax for a decedent dying after January 1, 2026 who made gifts between 2018 and the end of 2025, or the DSUE amount for the spouse that died between these dates that filed a return for portability. Finally, on November 26, 2019, the Treasury
Department and IRS issued regulations clarifying that the estate tax and DSUE amount will be calculated using the increased exclusion amount that was in place between December 31, 2017 and January 1, 2026, confirming that there will be no “claw back.”
Increased spending associated with COVID-19 will likely leave the government searching for revenue. One such avenue could be a reduction in the exclusion amount on the federal and/or state level, even prior to the current federal sunset date. It is more important than ever for an executor to file a federal estate tax return on the death of the first spouse to lock in the higher DSUE amount.
Additionally, individuals with high net worth should consider gifting assets now to reduce their taxable estate on both the federal and state levels.
With so many political and social changes on the horizon, it is of paramount important to work with an experienced estate planning attorney to discuss these issues, review your estate plan and potentially revise your current estate planning documents to include provisions for estate tax planning on the death of the first spouse. The potential to be subject to estate tax could increase for a significant number of individuals if the exclusion amount is lowered in the future.
Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.