Autumn for the Basic Exclusion Amount
September 2024
A year consists of 365 days, 12 months, and four seasons.
The seasons have been traditionally defined by the solstices and equinoxes, which depend on the relation of the Earth to the Sun.
The spring season begins on the vernal equinox in March, which is the date when day and night are equal. The summer season begins on the summer solstice in June, which is the longest day of the year. The fall season begins on the autumnal equinox in September, which is the date when day and night are equal again. The winter season begins on the winter solstice in December, which is the shortest day of the year.
The seasons are predictable and follow a pattern of growth, maturity, and then dormancy.
Certain tax provisions follow a similar and predictable path due to the political pendulum, particularly with respect to the amount that should be considered transferable free of estate tax.
Although estate tax is imposed on all estates, few pay estate tax. This is due primarily to the unified credit under I.R.C. § 2010, which is defined by the basic exclusion amount.
The temporary increase of the basic exclusion amount is scheduled to be reduced in the near future and, thus, is in its autumn season.
Basic Exclusion Amount
The basic exclusion amount is a key component for determining the unified credit against estate tax and is set forth in I.R.C. § 2010.
A credit of the applicable credit amount is allowed to the estate of every decedent against the estate tax imposed by I.R.C. § 2001. I.R.C. § 2010(a).
The “applicable credit amount” is the amount of tentative estate tax that would otherwise be determined for the applicable exclusion amount. I.R.C. § 2010(c)(1).
The “applicable exclusion amount” consists of two components. It is the sum of (1) the basic exclusion amount; and (2) in the case of a surviving spouse, the deceased spousal unused exclusion amount. I.R.C. § 2010(c)(2).
The “basic exclusion amount” is currently $10 million and adjusts for inflation, which is $13,610,000 for 2024. I.R.C. §§ 2010(c)(3)(B) & (C); Rev. Proc. 2023-34. This is a historic high and extremely favorable to taxpayers.
EXAMPLE: A owns various property interests with a total value of $12 million. In 2024, A dies when the value remains $12 million. The gross estate includes the property. I.R.C. § 2033. Estate tax of $0 is paid at A’s death. I.R.C. § 2010.
In effect, most estates are transferred without payment of estate tax because most gross estates are under the basic exclusion amount.
Sunset after 2025
The favorable increase in the basic exclusion amount is temporary and subject to reduction in the near future.
The basic exclusion amount is scheduled to return to only $5 million, adjusted for inflation, on January 1, 2026. I.R.C. §§ 2010(c)(3)(A) & (C).
To utilize the temporary increase, those with large estates should consider gift planning in 2024 and 2025 before the winter season arrives for the basic exclusion amount.