Estate Tax: 5 Important Facts | Change in Law a Welcome Relief

We are living in an era of estate tax that was unimaginable just 2 years ago.  Rejoice.

Thanks to a law that goes by the unwieldy name of the Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010, and the more snappily-named Tax Cuts and Jobs Act of 2017, U.S. citizens in 2018 had estate and gift tax exemptions of $11.18 million per person.

That means that if you die with an estate that is less than $11.18 million, then your estate will owe no federal taxes.

That’s amazing.  And the good news just keeps on coming.

If you are married, then your spouse also has an exemption of $11.18 million.  Together, you and your spouse can own $22.36 million in assets that will not be subject to federal estate tax.

Because of this high exemption, some experts estimate that less than 0.2% of U.S. citizens will have to pay a federal estate tax.  The amount of the exemption will actually increase every year, meaning even fewer people will be hit with the tax.

If you live in Texas, then there is another pleasant surprise.

Texas does not have an estate or inheritance tax.  Other people are not so lucky.  As of June 2018, Washington D.C. and sixteen states had some form of inheritance or estate tax: Massachusetts, Rhode Island, Connecticut, Maryland, Hawaii, Kentucky, Illinois, Iowa, Nebraska, Minnesota, New York, Pennsylvania, Maine, Washington, Oregon, Vermont.

Another fun fact:  your property will get a basis step-up when you die.  That means that the basis of your property will be its fair market value at the date of your death.  If you purchased a house for $100,000, and the value was $500,000 when you died, then your beneficiaries will inherit your house at a basis of $500,000.

There is no cap on the amount of appreciation that can be realized.

Here comes yet another benefit to living in Texas – because Texas is a community property state, the entire community property, and not just the deceased spouse’s undivided ½, receives a basis step-up when the first spouse dies.  Those assets, if still owned by the surviving spouse, will receive yet another basis step-up upon his or her death.

There is a lot of fine print to all of this, of course.

The 2010 law placed the exemption at $5 million and gave annual increases.  The 2017 law doubled the $5 million to $10 million and kept the annual increase formula, but is set to expire December 31, 2025.  That makes the increase temporary.

To get the married couple benefit of $22.36 million, you have to preserve the deceased spouse’s exemption by timely filing an estate tax return and affirmatively electing it.  This is called “portability,” and only applies to the estate and gift tax exemptions, not the generation-skipping transfer tax exemption.

All of these changes made thousands of estate plans and trusts obsolete. If you have one that pre-dates the tax law changes, then now is a good time to review it.

Virginia Hammerle, with Hammerle Finley Law Firm, is board certified in Civil Trial Law by the Texas Board of Legal Specialization.  See hammerle.com for her blog and newsletter sign-up.