While estate planning does focus on how your assets will be distributed after you pass away, it should also focus on preserving assets while you are alive as well as during the probate of your estate after you are gone. For many people, that means taking into account the impact federal (and sometimes state) gift and estate taxes will have on an estate. With that in mind, a Murfreesboro estate planning attorney at Bennett | Michael | Hornsby discusses what you need to know about gift and estate tax changes for 2024.
What Is the Federal Gift and Estate Tax?
When you pass away, the assets you owned at the time of your death will make up your estate. That estate must go through the legal process known as
“probate” following your death. At that time, the combined value of your estate assets and the value of any qualifying gifts you made during your lifetime will be subject to federal gift and estate taxes at the rate of 40 percent. Although the State of Tennessee does not impose a state level estate tax, some states do and should be considered when planning your estate.
What Is the Lifetime Exemption?
Every taxpayer is entitled to make use of the lifetime exemption which can significantly reduce a decedent’s taxable estate. In 2012, the American Taxpayer Relief Act of 2012 (ATRA) set the lifetime exemption amount at $5 million, adjusted each year thereafter for inflation; however, legislation signed into law in 2018 temporarily increased the lifetime exemption amount.
In 2024, the individual lifetime exemption amount will increase from its current $12.92 million to $13,610,000 million. Working together, a married couple will be able to shield a total of $27,220,000 million from federal gift and estate taxes.
It is important to keep in mind that the temporary increase in the lifetime exemption is just that – temporary. On January 1, 2026, the lifetime exemption is scheduled to “sunset” (revert) to the previous $5 million exemption amount, adjusted for inflation. The Internal Revenue Service (IRS) has clarified that estates that made gifts during the increased exemption period (2018-2025) can use the higher exclusion levels if the date of death occurs after the sunset provision drops the exemption back to the 2012 limit.
What Is the Annual Gift Tax Exclusion?
If tax avoidance is an estate planning goal, making use of the annual gift tax exclusion should be one of your most important tools. The annual exclusion allows every taxpayer to make tax-free gifts valued up to the current limit to an unlimited number of beneficiaries each year. Gifts made using the annual exclusion do not count against your lifetime exemption limit. In 2024, the annual exclusion amount will increase from $17,000 to $18,000. To put the value of the annual exclusion into perspective, imagine that a married couple made maximum value gifts each year for ten years to their four children. They would be able to pass down $144,000 each year for a total of $1,440,000 tax-free. The annual exclusion can also be used to make gifts to trusts and to charities.
What Is the Unlimited Marital Deduction?
A spouse may make unlimited gifts to the other spouse, during life or at the time of death, using the unlimited marital deduction unless the recipient spouse is not a U.S. citizen. U.S. tax law is written this may under the theory that allowing tax-free transfers between U.S. spouses simply delays the payment of taxes while gifting to a non-citizen allows the assets to escape taxation altogether. With that in mind, U.S. tax law limits gifts to a non-citizen spouse. In 2024, the limit for tax-free gifts to a non-citizen spouse will increase from $175,000 to $185,000. Keep in mind, however, that gifts in excess of that limit may be taxable at the rate of 40 percent absent additional estate planning precautions.
Contact a Murfreesboro Estate Planning Attorney
If you have additional questions or concerns about how to incorporate tax avoidance tools and strategies into your estate plan, consult with an experienced Murfreesboro estate planning attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.