The 2017 Tax Cuts and Jobs Act (“TCJA”), colloquially known as the “Trump tax cuts,” dramatically increased the federal estate tax and gift tax threshold/exemption amounts. Going into effect in 2018, we saw federal estate/gift tax exemption amounts more than double from 2017 levels:
| Year | Exemption Amount (single) | Exemption Amount (married) |
|---|---|---|
| 2017 | $5,490,000 | $10,980,000 |
| 2018 | $11,180,000 | $22,360,000 |
| 2019 | $11,400,000 | $22,800,000 |
| 2020 | $11,580,000 | $23,160,000 |
| 2021 | $11,700,000 | $23,400,000 |
| 2022 | $12,060,000 | $24,120,000 |
| 2023 | $12,920,000 | $25,840,000 |
| 2024 | $13,610,000 (current) | $27,220,000 (current) |
Absent any legislative action by Congress between now and then, these thresholds are set to sunset after 2025, and revert back to $5 million dollars, adjusted for inflation, for 2026.
It is estimated that in 2026, the federal estate tax exemption amount will be somewhere around $7 million dollars for a single person, and $14 million dollars for a married couple.
The federal estate tax rates range from 18%-40% depending upon the amount of the taxable estate.
| Taxable Amount | Tax Rate | Tax Owed |
|---|---|---|
| $0 – $10,000 | 18% | 18% of taxable amount |
| $10,001 – $20,000 | 20% | $1,800 plus 20% of the amount over $10,000 |
| $20,001 – $40,000 | 22% | $3,800 plus 22% of the amount over $20,000 |
| $40,001 – $60,000 | 24% | $8,200 plus 24% of the amount over $40,000 |
| $60,001 – $80,000 | 26% | $13,000 plus 26% of the amount over $60,000 |
| $80,001 – $100,000 | 28% | $18,200 plus 28% of the amount over $80,000 |
| $100,001 – $150,000 | 30% | $23,800 plus 30% of the amount over $100,000 |
| $150,001 – $250,000 | 32% | $38,800 plus 32% of the amount over $150,000 |
| $250,001 – $500,000 | 34% | $70,800 plus 34% of the amount over $250,000 |
| $500,001 – $750,000 | 37% | $155,800 plus 37% of the amount over $500,000 |
| $750,001 – $1,000,000 | 39% | $248,300 plus 39% of the amount over $750,000 |
| $1,000,001+ | 40% | $345,800 plus 40% of the amount over $1,000,000 |
Whether the increased exemption provisions of the TCJA are extended, or whether the exemption amounts are further reduced from the assumed $5 million dollar reversion in 2026, likely/largely depends on the outcome of the 2024 United States election. This is important for those without these extreme asset levels because given current real estate values, inflation rates, and general economic conditions, if the exemption amounts are further reduced, estates that may not be generally considered “high net worth” may be subject to taxation.
A Note About the Gift and Generation Skipping Taxes
We can’t talk about the federal estate tax without mentioning the gift tax and generation skipping tax (“GST”).
Gift Tax
When gifting, there are two exclusion amounts: an annual gift tax exclusion amount, and a lifetime exclusion amount. For 2024, the annual gift tax exclusion amount is $18,000. This means that you are allowed to gift each recipient up to the annual exclusion amount ($18,000 in 2024) tax-free. You are allowed to make as many gifts each year, up to $18,000 per person, that you’d like. Once a gift to one person exceeds the annual exclusion amount, you either pay the gift tax, or you can eat into your lifetime exclusion amount, and the gift is tax-free.
It is important to note that the federal estate tax exemption and the lifetime gift tax exemption amounts are ONE exemption (for 2024, the $13.61 million referenced above). This means that if you avoid paying taxes on an otherwise taxable gift by eating into your lifetime gift tax exclusion, you are reducing your federal estate tax exemption amount.
Fear not! In 2019, the IRS adopted regulations stating, among other things, that estates will not be penalized or unfairly taxed on gifts that were made during the increased exemption period. This means that for those who utilize the higher gift tax exemption before 2026, there will be no retroactive or “claw back” application of the lower exemption amounts. This is an important planning tool for high net-worth individuals to take advantage of the increased exemption amounts prior to the sunset.
Generation Skipping Tax
The generation skipping tax (“GST”) is imposed on transfers to “skip-persons” (this usually ends up being grandchildren). The GST applies to transfers to anyone more than 37.5 years younger than the donor, or to family members more than one generation younger than the donor (grandchildren, etc.).
Unlike the gift tax, the GST is a SEPARATE federal transfer tax, with its own exemption amount. It is a flat 40% tax rate. The GST exemption does, however, mirror the federal estate/gift tax exclusion amount, and is also going to sunset after 2025. For 2024, the GST exclusion amount is $13.61 million dollars.
Use it or Lose it: How to Plan for Federal Estate Tax Changes
While we may not have certainty on what exactly is going to happen, now is the time to begin reviewing your current estate plan, and/or large gifts you have made or are considering making, with a qualified estate planning attorney and accountant or other tax professional, to ensure that your plan offers the same or the best available estate tax avoidance, and that you and your family are as prepared as possible for the changes that are coming.
There are many ways to reduce or eliminate estate tax exposure. However, to take advantage of the increased federal exemption amounts, there are only a few options: spend down, make large lifetime gifts, or pass away during the increased exemption amounts.
Quite literally: if you don’t use it, you lose it.
Spending Down to Reduce Gross Estate
For those with a high enough net worth and enough money to live on for the rest of their lives, spending down helps to reduce the amount of your gross estate subject to estate tax. Go on that trip around the world you’ve been wanting to. Enjoy your wealth! This isn’t an open invitation to irrationally spend or make purchases you cannot afford to simply reduce an estate to below the threshold amount, though; continue to make smart financial decisions.
Gifting to Reduce Estate Tax Exposure
If you can afford to do so, gifting up to the exclusion amount is another option to reduce estate tax exposure before the threshold sunsets. As mentioned above, the IRS adopted regulations stating that for those who utilize the higher gift tax exemption before 2026, there will be no retroactive or “claw back” application of the lower exemption amounts. Therefore, a tax will not be imposed on excess gifts if made during the period of increased exemption amounts. This will allow an ability to take advantage of the increased exemption amounts for those that survive the provision’s sunset, that “typical” trust planning would not provide.
Gifting may also have the added benefit of reducing your taxable estate for STATE estate tax purposes, depending on state law. For information on how Massachusetts handles gifts for estate tax purposes, read our article New Massachusetts Estate Tax Law: What is it, and How to Plan Now.
Trust Planning to Reduce Estate Tax Exposure And Take Advantage of Increased Exemption Amounts
Trusts can also be used to reduce or eliminate estate tax exposure. For more on what trusts are and how they function, read our article: Overview of Basic Trusts and Their Functions. There are various types of trusts that can be set up for spouses, children, grandchildren, and further descendants, to take advantage of the increased exemption amounts.
A typical trust plan for married couples looking to reduce estate tax exposure using a credit shelter/family (bypass) trust and a marital trust, would not be successful in taking advantage of the increased exemption amounts, if they survive the sunset period. There are, however, available options such as Spousal Lifetime Access Trusts (SLAT) or other irrevocable trust planning (ex: irrevocable life insurance trust).
One of the more popular options for married couples is a SLAT, for which there are many rules, requirements, and considerations that are beyond the scope of this overview. SLATs function similarly to a bypass/marital trust plan by removing assets from the donor spouse’s estate up to their remaining federal estate/gift tax exemption for the benefit of the surviving spouse, while those assets avoid being included in the surviving spouse’s gross taxable estate upon the surviving spouse’s death. The difference, however, is that a SLAT is irrevocable and is funded by gift while both spouses are still alive. Therefore, the assets of the donor spouse transferred to the SLAT are sheltered from gift tax, allowing the donor spouse to take advantage of the increased exemption amount.
For a personalized review of your current estate, schedule a free consultation to discuss estate planning options, and determine what plan will be best for you and your family.
No information in this blog post is to be construed as, nor is intended to be, legal or tax advice. Consult with competent legal counsel and/or tax professionals prior to taking any action. Do not rely on any information contained in this blog post as the law changes from time-to-time and this blog post may not be updated to reflect those changes.
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