It's crucial to recognize that tax laws remain in effect only until Congress enacts new legislation. Moreover, even without any changes to current laws, many provisions of the 2017 Tax Cuts and Jobs Act are set to expire at the end of 2025. Therefore, it's essential to review your estate strategy with your legal and tax advisors to determine if any adjustments are necessary. 

Estate Tax and Exclusion Amount

For 2024, the federal estate tax exclusion amount is $13.61 million per individual, adjusted annually for inflation. This means you can pass up to $13.61 million at death ($27.22 million for a married couple) free from federal estate tax. The maximum federal estate tax rate for 2024 is 40%.

Gift Tax and Exclusion Amount

The gift tax exclusion amount is linked to the estate tax exclusion amount, also set at $13.61 million for 2024. You can use this amount either at your passing or during your lifetime. Essentially, you can gift up to $13.61 million ($27.22 million for a married couple) during your lifetime without incurring federal gift tax. However, any taxable gifts made during your life will reduce the remaining exclusion amount at your passing, dollar for dollar. The maximum federal gift tax rate is also 40%.

Portability Provision for Married Couples

The portability provision allows the surviving spouse to retain the deceased spouse's unused exclusion amount. For example, if a spouse dies, the surviving spouse can use their combined $27.22 million exclusion without additional planning. Specific tax-filing requirements must be met to utilize this option.

Generation-Skipping Transfer (GST) Tax and Exclusion Amount

GST tax applies when assets are transferred to individuals more than one generation away, such as grandchildren. The GST tax exclusion amount for 2024 is $13.61 million per individual, adjusted annually for inflation. The GST tax rate is 40%, which may be in addition to other estate/gift tax liabilities. Unlike estate/gift taxes, there is no portability of a spouse's unused exclusion amount for GST tax purposes. 

Estate Planning Strategies Can Help

• Credit Shelter Trust & Other Trust Planning

  • If you and your spouse each have a Last Will & Testament, consider adding the ability in the Will(s) of the surviving spouse to disclaim assets to avoid the assessment of federal estate tax
  • Consider the use of stand-alone Trust to hold assets during life and direct how specific assets under Trust pass at death.
  • While portability may offer long-term advantages, a credit shelter trust could also benefit you and your family. Addressing your estate now ensures your wishes are carried out.

• Consider Lifetime Gifting

  • Lifetime gifting can transfer assets and their future appreciation and income to beneficiaries to avoid the assessment of death taxes, depending on how and when gifted.
  • However, gifting during your lifetime also results in a transferred basis for the asset, potentially causing income tax consequences for gift recipient. 
  • Also note that the lifetime gift credit reduces the lifetime estate tax exclusion dollar for dollar, and can result in a decreased lifetime estate tax exclusion at death.

• Other Estate Reduction Strategies

  • Consider annual gifts up to $18,000 per person per year in 2024 (double this amount to $36,000 for a married couple) to reduce your estate and potential estate taxes. 
  • Charitable giving can reduce your taxable estate at death and create an income tax deduction in life when the gift is made. 
  • Discuss additional strategies with your tax and legal professionals, such as irrevocable life insurance trusts (ILITs), which can exclude the policy's death benefit from your estate

Step-Up in Cost Basis at Death

The cost basis is usually the price you paid for an asset, whether that asset is a stock, real estate, etc. For example, if you purchase a stock for $1 per share, your “basis” in the stock is $1. If you still own that stock at the time of your death, your estate may receive a “step-up” (or “step-down”) in basis to reflect the stock's fair market value at the time of your death. For example, if the stock's fair market value at your death is $20 per share, your estate would hold the stock with a $20 value and $20 basis. This adjustment allows your estate to pass assets to your beneficiaries at the new basis or sell the asset, potentially avoiding capital gains tax and lessens the income tax burden for your beneficiaries when they inherit your assets.

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Disclaimer: This blog post is for informational purposes only and should not be construed as legal advice OR tax advice. Always consult with a licensed attorney for legal advice and/or a licensed tax professional for tax advice.