2024 Federal Lifetime Estate and Gift Tax Changes: What You Need to Know
By Attorney Bryce Kaufman
As we step into the new year, there are some important changes that could have a significant impact on your estate planning. Both the federal gift exclusion and the federal lifetime Estate Tax exemption have significantly increased, creating additional opportunities for individuals and couples navigating estate and tax planning.
Annual Gift Tax Exclusion on the Rise
One notable change is the increase in the federal gift tax annual exclusion. In 2023, the exclusion stood at $17,000 per individual or $34,000 for a married couple. In 2024, these numbers are seeing a boost to $18,000 per individual and $36,000 for married couples. This adjustment provides individuals more flexibility in gifting without triggering federal gift taxes. Gifts over the federal annual exclusion require the filing of a gift tax return, which will simply lower the federal estate tax exemption described below. As long as there is any remaining estate and gift tax exemption, they do not result in gift tax being paid by the donor.
Here in the Pacific Northwest, there is no gifting limit at the state level. That means that a gift above the federal gift tax annual exclusion has no negative ramifications on state-level estate tax, nor does anything have to be filed with the state. Lifetime gifts completely avoid state estate tax at death in Oregon and Washington. Oregon will tax an estate over $1,000,000, regardless of single or married, at a progressive rate of 10%-16%, while Washington will tax an estate over $2,193,000, regardless of single or married, at a progressive rate of 10%-20%. With such low state level estate tax, setting up a trust and lifetime gifts are extremely beneficial.
Changes in the Federal Lifetime Estate and Gift Tax Exemption
For those considering the long-term implications of estate planning, the federal lifetime estate and gift tax exemption amounts are crucial. In 2023, the exemption was $12,920,000 for an individual or $25,840,000 for a married couple. However, due to inflation, in 2024 these figures increased to $13,610,000 for individuals and $27,220,000 for married couples. Any amount over this exemption is taxed at 40%.
It’s important to note that these current exemption amounts were established in 2017 under the Tax Cuts and Jobs Act and are currently slated to sunset at the end of 2025. Without legislative intervention, the exemption amounts could see a significant reduction to $5,000,000 per taxpayer or $10,000,000 for a married couple, indexed for inflation. If Congress does not enact any changes before January 1, 2026, the federal estate and gift tax exemption amount will likely be approximately $6,800,00 per person, or $13,600,000 for a married couple.
For those who might be wondering about the urgency of these changes, it’s essential to understand that time is of the essence. The Internal Revenue Service (IRS) has made it clear that large gifts made before the end of 2025 will be “locked in” or “grandfathered” to utilize the higher estate and gift tax exemption, protecting individuals and couples from potential reductions in the future. For example, a married couple gifts a total of $20,000,000 over the annual exclusion in 2024. Since this amount is below the exemption of $27,220,000, there is no tax implications. Now let’s pretend the married couple passes away in 2026 and the tax exemption has decreased to $13,600,000. Even though they gifted $20,000,000 in 2024 ($6,400,000 over exemption), they were grandfathered in to the rules at 2024, saving the estate $2,560,000.
What about Income Tax?
It is important to factor in income tax planning and what is called a “step-up in basis.” A step-up in basis refers to the adjustment of the value of an asset for tax purposes when it is transferred from one person to another, typically upon death (inheritance) or as a gift. This adjustment is often extremely beneficial for the recipient as it can potentially eliminate any income tax.
Inheritance: When someone passes away and leaves assets to their heirs, the heirs generally receive a “step-up” in the basis of the inherited assets to their fair market value at the time of the decedent’s death. This means that the new basis for the heirs is not the original cost of the asset but its value at the time of the decedent’s death. This is advantageous because it can reduce the income tax liability if the heirs decide to sell the inherited assets in the future. This applies to any appreciated nonqualified asset such as property or stock that has been appreciated. If children inherit the family home and sell it shortly after the parent’s death, the only income gains they would pay, if any, is that on the appreciation from date of death to the date of sale.
Gifting: When someone gifts an asset during their lifetime, the recipient generally takes over the donor’s basis in that asset. This is known as a “carryover basis.” However, certain gifts, such as those subject to the gift tax, may trigger a step-up in basis. For instance, if the donor paid gift tax on the gift, the recipient may receive a step-up in basis. However, they do not receive a second step-up after the donor’s death.
Looking Ahead: The Importance of Planning
The looming sunset of the current federal exemption at the end of 2025 underscores the need for planning. Without proper planning, individuals and families could face considerable estate tax liability.
As we move further into 2024, staying informed about these changes and consulting with financial and legal professionals becomes crucial for effective estate and tax planning. The evolving landscape of federal tax policies emphasizes the need for individuals to be proactive in navigating their financial affairs and ensuring that their legacy is protected for future generations.
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