The federal gift, estate, and generation-skipping transfer (GST) tax laws have undergone significant modifications as of the new year. In order to optimize the prospective tax benefits, individuals and families should be aware of the inflation adjustments for 2024, which offer rather significant increases to the gift and estate tax exemption amounts as well as increases to yearly exclusion donations.
The IRS’s changes to the exemptions should cause taxpayers to reevaluate their estate and gifting strategies with an eye toward increased tax efficiency and more significant intergenerational asset transfer. For individuals, the lifetime exemption from the federal estate tax and GST tax has increased by $690,000 (to $13.61 million from $12.92 million in 2023) and for married couples, it has increased by $1.38 million (to $27.22 million in 2024 from $25.84 million in 2023).
Currently, the generation-skipping tax exemption is identical to the estate tax exemption, allowing individuals to give assets to their grandchildren directly or through trust for their benefit. Families can avoid paying estate taxes twice by using the generation-skipping transfer (GST) strategy: once when the assets transfer from generation one to generation two, and once more when they transfer from generation two to generation three.
Therefore, this year, individuals are exempt from federal estate or generation-skipping taxes when they gift, leave, or grant a GST of up to $13.61 million to their heirs. For married couples, the dollar amount is doubled.
Families should take advantage of this 2024 rise by consulting with an expert to make sure their plans are set up to take advantage of the larger tax exemption limits. This is particularly significant because, unless additional legislation from Congress, the lifetime exemption amounts—which were nearly increased in 2017 upon the Tax Cuts and Jobs Act’s enactment—are scheduled to expire on December 31, 2025. The federal lifetime tax exemption amounts will be nearly halved if the existing law expires.
Furthermore, the yearly exclusion level from the federal gift tax increased by about 6% in 2024 to $18,000 per donee from $17,000, opening up still another option for more tax-efficient wealth transfers. GSTs are likewise covered by this. People ought to take advantage of this to put thoughtful gifting plans into place that help with intergenerational asset transfers and estate preservation.
Families would be well to plan their gifting before the end of 2025, while the lifetime exemption amounts are still historically high. Families may never get another chance to potentially save millions of dollars in federal taxes.
There exist multiple tactics that families might employ to leverage these tax advantages.
The easiest way is probably to give gifts every year. Under the yearly gift tax exclusion, a person can give up to $18,000 in 2024 to each recipient. The recipient of these donations is not subject to federal taxes on this “income,” and the gifts do not reduce the giver’s lifetime estate or gift tax exemptions. Notably, gifts made directly to the educational institution or healthcare provider for tuition or medical costs are still free from gift tax.
The giver’s lifetime gift tax exemption ($13.61 million in 2024) will be reduced if the amount gifted exceeds the yearly gift tax exclusion. This is an important reminder of the tax law. In order to track the lifetime exemption amount used and account for gifts, the giver must submit a gift tax return (IRS Form 709) with their federal income tax return if they donate a gift exceeding $18,000 in 2024.
Givers should think about using as much of their lifetime gift and estate tax exemptions as they can now to obtain the most benefits, regardless of whether the expanded exemptions are extended, as the current high lifetime exemption amounts are set to “sunset” at the end of 2025.
Through trusts, taxpayers can also benefit from annual gift tax deductions. Here are a few instances:
Permanent and Unchangeable Trust. Establishing a lifetime irrevocable trust is one estate planning tactic. When the “grantor” is still alive, they transfer assets from their estate to the trust. A gift tax exemption for the year and lifetime exemption from gift taxes are applicable when assets are put into an irrevocable trust. Grantors can avoid gift taxes by giving each beneficiary a fixed amount of assets when they take advantage of the yearly gift tax exception.
A grantor can transfer up to $18,000 per beneficiary this year without paying gift tax, just like with a straight cash gift. Any extra amount can be added to their lifetime gift tax exemption.
With this approach, persons can still benefit from gift tax exclusions and deductions while avoiding the possible issues that come with giving direct financial presents to others.
Annuity trust held by the grantor (GRAT). An irreversible trust called a GRAT gives the grantor the ability to transfer assets to beneficiaries while retaining the right to annuity payments from the trust each year for a predetermined period of time. The Internal Revenue Code’s Section 7520 defines the rate of return that forms the basis of the annuity. Any assets left in the trust at the conclusion of the designated term, especially any returns over the Section 7520 rate, go to the beneficiaries tax free.
GRATs can be particularly useful for efficiently transferring wealth, reducing taxes, improving retirement planning, and removing comparatively substantial sums of assets from a person’s taxable estate.
Trusts for Spousal Lifetime Access (SLAT). An irreversible trust known as a simplified life assurance trust (SLAT) permits a grantor to transfer assets to a trust for their children using their lifetime gift exemption without incurring federal gift or estate taxes, while allowing their spouse to receive benefits while they are still living. Up to the exemption limit ($13.61 million in 2024), the grantor may contribute assets to the trust on behalf of their spouse.
The remaining assets transfer to the grantor’s children and are thus eliminated from the grantor’s taxable estate, lowering the grantor’s potential estate tax burden.
State-level estate and gift taxes differ greatly, despite the fact that federal exceptions have risen. For this reason, it’s essential to speak with a licensed financial expert to find out your local tax rules and the best course of action for your unique situation.
In the end, though, it comes down to reviewing estate and gifting plans now in order to take advantage of the best possible strategic options, as these expanded exemptions may be about to expire soon.
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