We now know that each individual has a $10 million estate tax exclusion (adjusted for inflation) under the new federal estate tax legislation (the Tax Cuts and Jobs Act). In 2018, the applicable exclusion amount will be approximately $11,200,000, subject to final guidance from the IRS as to the inflation adjustments. Under the new law, this estate tax exclusion amount will revert back to the lower exclusion amount of $5,000,000 in 2026. Your estate planning documents should be sufficiently flexible to withstand regular changes in the federal tax law.
Married Couples and "Portability." A married couple can utilize their combined individual estate tax exemptions under certain circumstances. The ability for a married couple to combine their exemptions is called "portability" of the first estate tax exemption. There are restrictions and limitations associated with relying on the application of portability as your primary estate planning tool. You should discuss portability with your estate planning lawyer. One planning goal for a married couple is to determine whether reliance on the portability of any unused federal estate tax exemption of the first spouse to die will be a benefit to the estate on the second death. For a couple with a combined taxable estate between $15,000,000 and $20,000,000, a couple also needs to weigh the income tax versus estate tax consequences of their plan.
What About State Taxes and Exemptions? In many states, including Oregon and Washington, there is a state estate tax. Despite changes in federal law, Oregon's exemption remains $1,000,000, and Washington's exemption is $2,000,000, adjusted for inflation. Neither state provides for portability of the spouse's unused exemption, so it is critical to take certain legal steps to ensure that a married taxpayer does not lose their separate state exemption.