The New Year brings with it new estate and gift tax exemption and exclusion amounts.
In 2017, a new tax law doubled the federal estate and gift tax exemption. And that exemption amount has increased each year between 2018 and 2025 to adjust for inflation. The federal annual gift tax exclusion is also periodically increased to take inflation into account.
For the year 2024, the following exemption and annual exclusion amounts will be in effect:
- Federal Annual Gift Tax Exclusion: This year, an individual can gift up to $18,000 tax-free per gift-recipient. A married couple may combine their gift and give up to $36,000 tax-free per gift-recipient.
- Federal Estate and Gift Tax Exemption: The federal estate and gift tax lifetime exemption in 2024 is $13,610,000 (an increase of $690,000 from 2023).
- Connecticut Estate and Gift Tax Exemption: The Connecticut estate and gift tax exemption is currently tied to the federal exemption. Thus, for 2024, the Connecticut estate and gift tax exemption is also $13,610,000.
What happens at the end of 2025?
Unless Congress acts to maintain the high estate and gift tax lifetime exemption amounts, the levels set by the 2017 legislation will sunset at the end of 2025. This means that the federal estate and gift tax exemption, and by extension the Connecticut estate and gift tax exemption, will be cut from more than $13,610,000 to roughly $7,000,000 (2017 level of $5 million as adjusted for inflation). High net worth individuals risk losing out on the benefit of the high exemption amount unless they act soon.
What can be done now?
The IRS has explained that individuals can take advantage of the historically high estate and gift tax exemption levels now without being adversely impacted after the exemption level drops at the beginning of 2026. What this means is that when an individual dies, their estate can compute its estate tax credit using the basic exclusion amount applicable to the gifts that the individual made during their lifetime if that amount is higher than the basic exclusion amount in the year the individual dies. Thus, now is the perfect time for ultra-high net worth individuals (e.g. individuals who have assets in excess of $30 million) to consult with your estate planning attorney to review your options based on your circumstances and consider making large taxable gifts before the law sunsets.
You also have other options if reducing the size of your taxable estate is a goal for your estate plan. You can take advantage of making gifts within the annual gift tax exclusion amount. While there is a limit on the value of the gift that can be given before being subject to the gift tax, there is not a limit on the number of gift-recipients. If you adopt an annual plan to consistently make these tax-free gifts, you can effectively remove significant wealth from your taxable estate over time on a tax-efficient basis. Furthermore, if you are charitably included, you can incorporate charitable giving in your annual giving and estate planning.
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