A New Year is upon us, it is an election year, and a rollback of the federal estate, gift, and generation-skipping transfer taxes is scheduled for the not too distant future. State and federal estate and gift taxes are an important consideration for estate planning in the United States. Now is an opportune time to consider leveraging gifting plans while exemptions against the federal estate and gift tax are at an all-time high.

FEDERAL ESTATE AND GIFT TAX EXEMPTIONS

Now is the time to start considering use of the federal gift and estate tax exemption to ensure enough time for thoughtful planning before a potential rollback of the federal gift and estate tax exemption. The federal estate and gift tax lifetime exemption reflects the total amount any US person may transfer to another person or persons during life or at death, combined, without owing federal gift or estate tax. The amount of gifts made during life reduces the amount of the federal estate tax exemption available to protect a taxpayer’s remaining estate from federal estate tax at the death of the transferor (in all events, transfers to US citizen spouses and qualified charitable organizations are not generally subject to federal gift and estate tax).

Under current law, the federal gift and estate tax exemptions adjust annually for inflation. One benefit to continued high inflation in 2023 is that the federal gift and estate tax exemption increased from US$12,920,000 per taxpayer in 2023 to US$13,610,000 per taxpayer in 2024. In 2024, married couples now have a combined total federal gift and estate tax exemption of US$27,220,000. For married couples who already maximized their federal gift and estate tax exemption in 2023, an additional US$1,380,000 of federal gift and estate tax exemption is now available. Any transfers, in total, during life or at death in excess of the federal gift and estate tax exemption are subject to a 40% federal gift or estate tax.

GENERATION-SKIPPING TRANSFER TAX

In addition to federal gift and estate tax, federal law imposes a generation-skipping transfer tax (GST Tax), also at a rate of 40%, on certain transfers of wealth to individuals two or more generations below the transferor. This tax is intended to discourage taxpayers from avoiding the tax generally imposed at each generation level by imposing a second tax when the taxpayer’s gift or bequest skips a generation. Federal law provides for a lifetime exemption from the GST Tax for wealth transfers that would otherwise be subject to the tax. In 2024, the federal GST Tax exemption increased along with the federal gift and estate tax exemption to US$13,610,000 per taxpayer (US$27,220,000 for a married couple).

POSSIBLE ROLLBACK OF HIGH FEDERAL GIFT, ESTATE AND GST EXEMPTIONS

For individuals with a net worth in excess of US$13,610,000, or married couples with a combined net worth in excess of US$27,220,000, there may be limited time to take advantage of these high federal exemptions. Under the 2017 Tax Cuts and Jobs Act, the base amounts of the lifetime federal gift, estate, and GST Tax exemptions were doubled, but this increase has not been made permanent. After 2025, this “doubling” of the exemptions will expire. The then-existing exemptions effectively will be cut in half, unless Congress extends or modifies the exemptions before then. Extending or making permanent the current federal exemption amounts would require an affirmative act of Congress. As a result, taxpayers may wish to consider strategies through lifetime gifts outright or in trust to lock in the current higher exemptions (including the annual inflation adjustments) before the end of 2025, when the exemptions may be reduced by one-half.

ANNUAL EXCLUSION GIFTING

Clients also may wish to consider leveraging the annual exclusion for gifting. Each taxpayer can make annual gifts of up to US$18,000 per recipient in 2024 to an unlimited number of individuals free from any gift tax. For a married couple splitting gifts, this allows for annual tax-free gifts of up to US$36,000 per recipient. This year the annual gift tax exclusion amount increased from the 2023 annual exclusion of US$17,000 per recipient. Because these gifts are within the annual exclusion amount, the gifts do not reduce the taxpayer’s lifetime federal estate and gift tax exemption (discussed below). These annual exclusion gifts are an effective way to pass wealth to family members or others free from estate or gift taxes as well as reduce one’s asset base that will be subject to estate tax at one’s passing. All gifts made outright can qualify for this annual exclusion, and certain gifts made to a beneficiary in trust also can qualify for the annual exclusion if properly structured.

Under current law, the annual exclusion is renewed each year, but one cannot apply last year’s annual exclusion amount to this year’s gifts. For persons planning to make annual exclusion gifts this year, the gifts must be completed by 31 December 2024.

STATE LAW IMPLICATIONS

Gift Tax

Connecticut is the only state that imposes a separate gift tax, though some states consider gifts made within a certain period of death (e.g., 3 years in New York, 1 year in Pennsylvania). If you reside in a state with no gift tax, lifetime gifts are extremely beneficial as they could also remove assets from your future estate with no impact on your estate tax posture.

Estate Tax

Many states, such as Connecticut, New York, and Massachusetts, impose a separate estate tax that should be taken into consideration for residents of the applicable state and nonresidents who own real property or tangible personal property within the applicable state. State estate taxes operate similarly to federal estate taxes with separate exemption amounts and tax rates.

Inheritance Tax 

Other states, such as Pennsylvania and New Jersey, impose an inheritance tax, which taxes property transferred at death based on the relationship of the recipient to the decedent. Pennsylvania’s inheritance tax rates range from 0% on transfers to spouses and charity to 15% on transfers to individuals who are unrelated to the decedent, such as friends.

GST Tax

No state imposes its own GST Tax.

ACT NOW

Because lifetime transfers are often more effective at reducing estate taxes than transfers that occur upon one’s passing, the large increase in the lifetime federal exemptions this year offers opportunities for further and effective estate planning, particularly for families that have already made significant lifetime taxable gifts. With the future of federal gift and estate tax exemptions unknown with a rollback of the exemptions currently scheduled, clients are encouraged to consider estate planning opportunities currently available.