The landscape of federal estate and gift taxes is set for a significant update in 2024. These changes, primarily driven by inflation adjustments, are crucial for individuals and estate planners to understand. The modifications affect the gift tax annual exclusion and the federal estate tax exemption, impacting how estates are managed, and gifts are given.
Key Changes in the Annual Exclusion
In 2024, the gift tax annual exclusion is set to increase, reflecting an adjustment for inflation. This change will increase the exclusion amount from $17,000 to $18,000. This increment means that an individual can gift up to $18,000 to another person without the necessity of filing a federal gift tax return.
Strategic Utilization of the Annual Exclusion
An important aspect to note is the per-year nature of this exclusion. Individuals must understand that this exclusion does not accumulate or roll over to subsequent years. The ‘use it or lose it’ principle applies here, emphasizing the importance of strategic planning within the calendar year to maximize the benefit of this exclusion.
Substantial Rise in Exemption Amount
The federal estate tax exemption, a critical component in estate planning, is substantially increasing. For individuals who pass away in 2024, the exempt amount from federal estate tax is projected to be $13.61 million, up from $12.92 million for estates of individuals who died in 2023.
Implications for Married Couples
Married couples need to pay particular attention to these changes. Each partner in a married couple is entitled to the exemption amount, which effectively doubles their combined exemption. For 2024, this means that a married couple can shield a total of $27.22 million from federal estate taxes, assuming both partners pass away in that year.
Estate Tax Exemption and Gift Transfers
It’s also important to highlight that the exemption amount is not solely confined to estate taxes at death but can also be applied to transfers by gifts that exceed the annual exclusion limit. This provides an additional avenue for estate planning strategies.
State-Level Death Taxes
Despite the generous federal exemptions, it is crucial to consider state-level taxes. Some states impose their own estate and inheritance taxes, often at lower wealth thresholds than the federal limits. These state-level taxes can significantly impact an estate’s overall tax liability.
Future Reductions in Exemption Amounts
Another critical factor to consider is the potential future changes in the exemption amounts. Under current law, the federal estate tax exemption is scheduled to be reduced approximately in half by the year 2026. This impending change necessitates forward-looking planning to mitigate potential tax liabilities.
The Imperative of Continued Vigilance
Given the evolving nature of tax laws and the impending reduction in exemption amounts, individuals and estate planners must remain vigilant. Staying informed and proactive in planning strategies is essential to navigate the complexities of estate and gift taxes effectively.
2024 brings significant changes to the federal estate and gift tax exemptions. With the increase in the gift tax annual exclusion and the federal estate tax exemption, individuals and estate planners have new opportunities for strategic tax planning. However, the necessity to remain aware of state-level taxes and potential future reductions in exemption amounts cannot be understated. By carefully planning and understanding these changes, individuals can effectively manage their estates and gift-giving strategies to optimize tax benefits.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
