New 2020 Gift and Estate Tax Rules

In 2020, the federal estate tax basic exclusion amount increases from $11.4 million to $11.58 million. This increased amount allows married couples who set up their estate planning legal program correctly, and pass away in 2020, to shield $23.16 million of their estate from the 40% federal estate tax.

The important point that people need to realize now is that while people are putting their estate planning legal programs into place here in 2020, most of those people who sign their Wills and Trusts won't pass away until after the Basic Exclusion Amount gets cut in half in 2026.

Issues like portability (which allow the surviving spouse to use the deceased spouse's unused exclusion amount if elected properly on the timely filed estate tax return of the first spouse to die), and QTIP (which allow for no estate tax to be paid regardless of estate size of the first spouse to die if the couple takes advantage of what the federal estate tax marital deduction has to offer) become important issues to address in 2020 - in anticipation of what might occur if a death occurs when the exclusion amount is less (perhaps far less) than what it is today.

For 2019, the present interest annual exclusion amount was $15,000. For 2020, it remains at $15,000. This amount gets adjusted for inflation but it only will increase in $1,000 increments. Note that this $15,000 is the maximum amount that a Donor can donate to an individual in any calendar year. Gifts in excess of the $15,000 present interest annual exclusion must be reported on the Donor's IRS Form 709, Gift Tax Return.

Contrary to popular belief, the donee does not need to report the gift on the donee's income tax return (regardless of the amount of the gift), and the donor does not get to use the gift as a deduction on their income tax return (regardless of the amount of the gift. Gifts are reported on the separate gift tax return, which coincidentally is due on April 15 of the year following the year in which the gift was made.

In addition to being able to give $15,000 to as many people as you want to without using any of your estate tax exemption, you can also pay educational and medical expenses for others. Make sure you understand the rules regarding payments being made directly to the educational institution or the health care provider.

When parents, grandparents, or others make gifts, they typically make gifts either outright or in trust. Gifts in trust are typically a gift of a future interest and do not qualify for the present interest annual exclusion. However, you can meet the present interest requirement by giving them the Crummey withdrawal power for a limited time after the transfer to the trust.

Note also that you can bunch five years worth of annual exclusion gifts in one year when those gifts are contributed to a 529 Plan.

You can make unlimited gifts to your spouse. And spouses can make elections to engage in gift-splitting, which make a large gift by one spouse deemed to have been made by both spouses.

The Tax Cuts and Jobs Act in 2017 provides that the estate tax exclusion amount, is $10 million adjusted for inflation through 2025, will revert back to $5 million adjusted for inflation, for people who pass away in 2026 and beyond.

Here are some examples I've interpreted from the Final Regulations issued by the Department of the Treasury:

Example 1: Dad makes a $9 million gift in 2020 when his exclusion amount was $11.58 million. He dies in 2026 when the exclusion amount is $6 million. Result: no gift or estate tax on the $9 million Dad donated, but estate tax will be due on everything he owned when he died. Consequence: if the law does not change, wealthy people will make large gifts just prior to 1/1/26.

Example 2: Same as Example 1, but Dad gifted $4 million in 2020. Result: When Dad dies in 2026, his estate will exempt $2 million from estate tax (the $4 million he used while he was alive plus another $2 million since his exclusion amount in the year of his death was $6 million.

Example 3: Mom died in 2020 without using any of her $11.58 estate tax exemption. Perhaps she left it all to Dad under the federal estate tax marital deduction. Mom's executor files a timely filed estate tax return and elects portability. Dad dies in 2026 when the exclusion amount is $6 million. Dad can shield $17.58 million from the 40% estate tax.

Bottom line - if you have an eight-figure estate (or more), you need to get informed and get your legal affairs in order now if you want to protect as much of your estate as possible from the federal estate and gift tax.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

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