The federal gift, estate, and generation-skipping transfer (GST) tax exemptions and the annual exclusion from gift tax are historically high, due to a temporary increase under the Tax Cuts and Jobs Act. However, absent the passage of further legislation, the regulations that elevated the exemptions are set to expire at the end of 2025 and the exemption amount will be cut back to half the current value (adjusted for inflation) effective January 1, 2026. To the extent the increased exemption is not used by the end of 2025, it will be lost.
Individuals who may be affected by the gift and estate tax should consider using the increased exemption amount before it is too late. There are numerous estate planning techniques available to utilize this exemption to efficiently transfer wealth during an individual’s lifetime.
With 2023 winding down, it is also time to look to the increase in gift and estate tax exemptions the new year brings. These increases, announced by the IRS on November 9, 2023, include a rise in the federal gift, estate, and GST tax exemptions and the annual exclusion from gift tax, all of which will take effect on January 1, 2024.
Gift and Estate Tax Exemption
The gift and estate tax exemption will increase to $13,610,000 per individual for 2024. Married couples will be able to transfer up to $27,220,000 as both spouses can take advantage of the exemption. This is an increase of $690,000 per individual ($1,380,000 per married couple) from 2023. Generally, gift and estate taxes may be due if an individual’s total wealth transfer, during their lifetime and at death, exceeds the gift and estate tax exemption.
Generation-Skipping Transfer Tax Exemption
The GST tax exemption will similarly increase to $13,610,000 per individual ($27,220,000 per married couple) for 2024. This is also an increase of $690,000 per individual ($1,380,000 per married couple) from 2023. The GST tax may be triggered by transfers to, or in trust for, family members who are more than one generation younger than the donor, or unrelated individuals who are more than 37.5 years younger than the donor.
Annual Gift Tax Exclusion
The annual gift tax exclusion will increase to $18,000 per donor, per gift recipient (or $36,000 per married couple splitting gifts) for 2024. This is an increase of $1,000 per individual ($2,000 per married couple splitting gifts) from 2023. The annual gift tax exclusion permits individuals to make gifts to any number of donees tax free, every year, without using a portion of their gift and estate tax exemption.
This December, individuals should consider using the 2023 annual gift tax exclusion ($17,000 for individuals or $34,000 for married couples filing jointly) to make gifts to children and grandchildren. Although the annual gift tax exclusion may seem modest when compared to the gift and estate tax exemption, it can be a useful tool to aid in reducing an individual’s taxable estate in the long term.
Looking to 2024, individuals have a time-sensitive opportunity to transfer significant assets and secure the tax benefits of the temporarily high exemption. Even if an individual has already fully utilized their current exemption, such individual will be able to make additional gifts ($690,000 per individual or $1,380,000 per married couple) in 2024 due to the increase in the exemption.
Individuals should consider funding trusts with assets that are believed to have a high growth potential, using a portion of their gift tax exemption now, and removing future appreciation from their estates. Additional opportunities for tax efficiency may arise when planning with business interests, as careful planning may achieve a discount on the value of the interests transferred, allowing the gift exemption to be stretched to cover more value.