First spouse exemption a great way to pass estates to a trust

Dear Michael: We are under the impression that the “Big, Beautiful Tax Bill” gave us a break on our estate taxes as well as new gifting limits. How much more can we pass on this year, without incurring gift taxes and/or estate taxes? We are thinking about gifting some farmland to our children, as they can certainly use it for their farm operation, and we don’t need the income from it. – In a Gifting Frame of Mind.

Dear Gifting Frame of Mind: Unfortunately, the “Big, Beautiful Tax Bill” had no relief on either estate or gift taxes.

However, the amount that can be given without registering for gift taxes has now risen to $19,000 per person and $38,000 for a married couple.

Remember, you do not need your spouse’s consent to use their tax-free gift each year, unless, of course, they are already using it.

What happens if you exceed this amount? Do you have to write a check to IRS?

Any annual gift amount over the annual gift exclusion limit reduces the estate tax credit upon death. The current amount that can be left free of estate taxation at death is now $13,990,000 and will surpass $14,000,000 next year. Again, this is doubled for married couples, so the amount would be close to $28,000,000 estate tax free.

Again, one spouse is allowed to use both spouse’s exemptions as long as upon the first spouse’s death, none of the Unified Credit was used AND (this is a big AND) the surviving spouse files to receive this unused exemption within nine months of the date of death.

If not filed within the timeframe, either you hire a high-priced tax attorney to explain why you did not file or you lose the extra exemption.

It has always been a wonder more people do not pass their estates to a trust using the first spouse’s exemption. This accomplishes two things: One, the if the estate continues to grow and outgrows the $28,000,000 mark, it does not matter as it is no longer owned by the survivor directly. He or she can receive all the income from the trust, but the estate is out of their name and cannot be taxed. Not to say you would put 100 percent of it there – you would want to keep a little nest egg for yourselves.

The second thing it accomplishes is this property is no longer attachable for Medicaid. Medicaid has five years to claim the survivor spouse should have taken half, but after that period, your estate remains clear of Medicaid and probate issues. Just a thought!

Let us say, for example, your estate is already more than $28,000,000 or you are fast closing on this precipice. You know that 40 percent of the excess is going to go to the IRS.

Again, why not take advantage of the gift of $28,000,000 today and use your Unified Credit before you die. By doing so, all the inflation in your estate is now going to be free from estate taxes in the future. Considering farmland is growing at 7-10 percent in some counties, if you are close to the $14,000,000 or $28,000,000 for married spouses, perhaps it is time to move it out of the way now. This is known as an “estate freezing” technique – or you freeze the value of today and need not worry about tomorrow.

One caveat. Any gifts given during lifetime retain their current basis – or what you paid for it. If your heirs are immediately going to sell the property upon your death, they will pay capital gains on almost the entire amount. One must determine if the capital gains cost would be more than the estate tax savings and make the appropriate decisions.