Here is an overview of certain estate and gift tax rules currently in effect, the changes on the horizon, and ways you can save estate taxes for your family.
Current Rules
- The 2024 federal gift and estate tax exemption (the total amount you can give to others during your life or at your death, the “Federal Exemption”) is $13,610,000.
- The federal tax rate on amounts exceeding the Federal Exemption is 40%.
- The 2024 annual tax-free gift amount (the annual amount you can give someone without using your Federal Exemption) is $18,000 per recipient for 2024 (a married couple can give $36,000).
- Direct payments of tuition and medical bills do not use up your Federal Exemption.
Changes Coming
- The Federal Exemption will increase to $13,990,000 in 2025.
- The annual tax-free gift amount will increase to $19,000 (or $38,000 for a married couple) in 2025.
- The 2017 Tax Cuts and Jobs Act will expire on January 1, 2026. As a result, the historically high Federal Exemption will fall to about $7,000,000, drastically reducing the amount that individuals can give to their loved ones at death without paying federal estate tax.
Election Will Bring Further Changes
- The election will determine if the Federal Exemption will change.
- Trump has proposed making the Tax Cuts and Jobs Act changes permanent, which will make the Federal Exemption about $14,000,000 in 2026, with future increases annually based on inflation.
- Harris has indicated she will allow the Federal Exemption to fall to $7,000,000. She has gone further to express support for lowering the Federal Exemption to $3,500,000 and increasing the federal gift and estate tax rate above the $3,500,000 floor to 55% on transfers of up to $13,000,000, 60% on transfers over $13,000,000, and 65% on transfers over $93,000,000.
Planning Options to Reduce Estate Tax
- Those whose assets exceed the current or future exemption amount must consult with their advisors and consider taking action before the scheduled reduction of the Federal Exemption in 2026. Remember, the federal estate tax rate on amounts exceeding the Federal Exemption is 40%.
- Wealthy individuals should take advantage of the historically high federal gift and estate tax exemption before it is cut in half (or more) by making a gift of an amount equal to the Federal Exemption. You should not wait until a new administration is sworn in. It is critical to begin planning as soon as possible as advisors will be extremely busy and it will be difficult to implement your plan if you wait too long. There are a variety of ways to make gifts we can explore with you, many of which involve creating a Trust for the benefit of your spouse and/or family members. We can explore what fits your circumstances with you.
- You should also take advantage of the annual tax-free gift amount each year to reduce your taxable estate. Gifts can be made outright, in trust, or to a 529 college savings plan. We recommend making your annual gifts each year in January to allow future growth to accrue out of your hands but don’t miss 2024’s gifts if you didn’t make them yet.
The sooner you act, the more options you will have to save estate taxes for your family. Please let us know how we can help you implement and realize your goals.
Should you have any questions regarding the above, please contact the authors, the Garfunkel Wild attorney with whom you regularly work, or contact us at [email protected].