Another major change is the addition of a portability provision, which allows the living spouse of a deceased to use the deceased spouse’s unused exclusion. For example, if the deceased spouse had assets of $2 million at death, there is $3 million of estate tax exclusion still available ($5 million-$2 million) that is passed to the surviving spouse to use. If the living spouse has assets of $6 million at death, that spouse can use the additional $3 million of spousal unused exemption to increase the taxable exempt value of his estate to cover up to $8 million as the new taxable threshold ($8 million exemption - $6 million estate = $ zero above exemption). No estate tax would be owed even though he died with an estate valued at $6 million.

If an estate does owe an estate tax, the tax rate is 35 percent. The tax rate for gifts and estates exceeding a combined $5 million per person is 35 percent. For example, if a single person gifted $2 million of assets during his lifetime and still had $4 million in assets at death, the total estate valuation is $6 million. The estate has a $5 million dollar amount that is excluded from tax, so the $1 million balance above the exemption would be taxed at 35 percent, or $350,000 in estate tax is owed the federal government. There might also be an estate tax owed to that person’s state of residence depending on state law.

Another important change was the allowance of a step-up in property basis. For example: John purchased some land for $400 per acre, and at death its fair market value is $3,000 per acre. If he has an heir that inherits this land, the basis, or valuation for calculation of capital gain is $3,000 per acre, the fair market value at death. If the heir sells the property after inheriting it for $3,000 per acre or less, there is no capital gains tax owed.

To the contrary, if John were to gift the property during his lifetime, the basis stays at $400 per acre. If the heir receives the property while John is alive and sells it for $3,000 per acre, there is a taxable capital gain of $2,600 per acre ($3,000 - $400), which is taxed at the capital gains rate based on his adjusted gross income for income tax purposes.

Estate and business succession planning can be complicated. Consult an estate attorney or other qualified professional before finalizing an estate plan