"WSJ Tax Guide 2019: Estate and Gift Taxes"

“Lawmakers didn’t repeal the estate tax, but they doubled the exemption, reducing the number of liable estates.


The overhaul doubled the estate- and gift-tax exemption, which is a combined amount that applies to an individual’s gifts made during life or assets left at death.

For 2018, the limit rose to $11.18 million per individual and $22.36 million per married couple. For 2019, an inflation adjustment lifts it to $11.4 million per individual and $22.8 million per couple.

This increase in the exemption is set to lapse after 2025. In November 2018, the Treasury Department and the IRS issued proposed regulations that would allow individuals who make large gifts between 2018 and 2025 to retain the tax benefit of the higher exemption, even if it reverts to pre-2018 levels.

Here is a simplified example. Say that John has assets of $11 million, and he gives it to a trust for his heirs in 2019. The transfer is free of gift tax because the exemption is $11.18 million for 2019.

But after 2025 the exemption reverts to its 2017 level of $5.49 million (plus an inflation adjustment), and John dies in 2026. Under to the Treasury proposal, John’s estate wouldn’t owe tax on the portion of his 2019 gift that’s above the 2026 exemption.

The number of estates the tax will apply to is expected to drop sharply as a result of the overhaul’s changes. Fewer than 2,000 estates, or 0.1% of people who die, are expected to owe estate tax for 2019, according to estimates by the Tax Policy Center. For 2017, when the exemption was $5.49 million per person, an estimated 6,500 estates owed the tax.

• No capital gains at death: Assets held at death still aren’t subject to capital-gains tax. This is known as the “step-up in basis.”

For example, say that Robert dies owning shares of stock worth $100 each that he bought for $5, and he held them in a taxable account rather than a tax-favored retirement plan such as an IRA.

Because of the step-up provision, Robert’s estate won’t owe capital-gains tax on the $95 of growth in each share of stock. Instead, the shares go into his estate at their full market value of $100 each. Heirs who receive the shares then have a cost of $100 each as a starting point for measuring taxable gain when they sell.

• Portability: The tax overhaul also didn’t change the rules on portability, a generous tax benefit for many married couples. It allows a surviving spouse to receive the unused portion of the federal estate-tax exemption of the spouse who died.

If Linda dies in 2019 leaving an estate of $2 million to heirs other than her husband, Jack, he could claim the $9.4 million of Linda’s unused exemption for his own use during life or after his death.

• Annual gifts: The law also allows any taxpayer to make annual gifts to anyone—relative, neighbor, friend or stranger—up to a certain amount free of federal gift tax. An inflation adjustment raised this exemption from $14,000 to $15,000 per recipient for 2018, and it will remain at that level for 2019.

Above this exemption, taxable gifts are subtracted from an individual’s lifetime estate- and gift-tax exemption, which is currently $11.4 million per person.

These annual gifts aren’t deductible from income tax, but they do gradually remove assets from the giver’s estate, and the amounts can add up—especially if the assets grow in value after the gift. A husband and wife with three married children and six grandchildren, for example, could shift $360,000 a year to the 12 family members by using this benefit.

The annual exemption can be used to transfer complex assets, such as fractional shares of a business, but expert help is recommended.

• Bunching gifts for college: In an alternative strategy, givers can “bunch” five years of annual $15,000 gifts to a 529 education-savings plan, typically for children or grandchildren.

No tax is due, but a gift-tax form should be filed, says Mark Kantrowitz, the publisher of savingforcollege.com.”