The New Year brought inflation adjustments to the federal and some states’ gift/estate tax exemption amounts, thereby increasing the amount individuals can gift during life and at death free of federal and state gift and estate tax. Given the significant 2024 inflation adjustments, particularly with respect to the federal gift/estate and generation-skipping transfer (“GST”) tax exemption amounts, the New Year presents a prime estate planning opportunity not only for those individuals who have not previously engaged in significant gifting, but also for those individuals who previously made gifts to capture their exemptions and who now have additional exemption available.
The Federal Gift, Estate, and GST Tax Exemption Amounts
Under current federal law, the federal gift/estate tax exemption amount (i.e., the basic exclusion amount) is an amount equal to $10,000,000, adjusted for inflation since 2017. In 2023, the federal gift/estate tax exemption amount was $12,920,000, which increased to $13,610,000 with the 2024 inflation adjustment (a $690,000 increase).
In addition, the federal generation-skipping transfer (“GST”) tax exemption amount is an amount that mirrors the basic exclusion amount. Accordingly, the federal GST tax exemption amount also increased from $12,920,000 to $13,610,000 as of January 1, 2024.
These amounts will continue to increase for inflation each year until December 31, 2025. Under current federal law, the increase in the federal basic exclusion amount is scheduled to automatically sunset on December 31, 2025, from $10,000,000 plus an inflation adjustment, to $5,000,000 plus an inflation adjustment. As such, on January 1, 2026, the exemption amounts are scheduled to be automatically slashed by approximately one-half.
The Federal Annual Exclusion Amount
Under current federal law, there is a set amount (known as the annual exclusion amount) that an individual can give to any number of donees each year, which is not included in the total amount of gifts made by the donor in the year (i.e., it is not subject to federal gift tax nor does it use any of the lifetime gift tax exemption amount discussed above), and which is adjusted periodically for inflation. In 2023, the federal annual exclusion amount was $17,000, which increased to $18,000 with the 2024 inflation adjustment.
There is also a separate annual exclusion amount applicable to certain transfers between spouses. Under federal law, any transfers between spouses when the donee-spouse is a U.S. citizen enjoy the benefit of the unlimited marital gift tax deduction. However, this deduction is not available for transfers when the donee-spouse is not a U.S. citizen. Rather, there is a set amount each year (commonly known as the enhanced annual exclusion amount) that can be gifted from a U.S. citizen spouse to a non-U.S. citizen spouse, which is also adjusted periodically for inflation. In 2023, the enhanced annual exclusion amount was $175,000, which increased to $185,000 with the 2024 inflation adjustment.
The State Estate Tax Exemption Amounts
All states that impose a state-level estate tax at death provide for an exemption from the tax similar to the federal estate tax exemption, and some of those states adjust their exemption amounts annually for inflation. The exemption amounts in 2023 and 2024 are as follows:
Given the significant 2024 inflation adjustments with respect to the federal gift/estate and GST tax exemption amounts, the New Year presents a prime estate planning opportunity for individuals to be able to pass additional wealth free of transfer taxation. In addition, as indicated above, on December 31, 2025, under current federal law, the federal exemption amounts are scheduled to be automatically slashed by approximately one-half. As such, it is best for individuals to begin working with their advisers now to put vehicles in place to capture their exemptions prior to the sunset of the exemption amounts.
[1] Connecticut is the only state in the union that imposes a state-level gift tax, which imposes a tax on (i) a Connecticut resident’s transfer of any property (excluding real or tangible personal property having a situs outside of the State of Connecticut) and (ii) a non-Connecticut resident’s transfer of real or tangible personal property having a situs in the State of Connecticut. Similar to the federal gift/estate tax exemption amount, Connecticut provides for an exemption from the state gift and estate tax, which is a unified credit that can be used during life (in making taxable gifts) or at death.
[2] Beginning on January 1, 2023, the Connecticut gift/estate tax exemption amount now matches the federal gift/estate tax exemption amount.
[3] The Commonwealth of Massachusetts’ estate tax exemption is not adjusted annually for inflation. Prior to October 2023, the estate tax exemption amount remained static at $1,000,000 since 2006. However, under an act of the Commonwealth that was passed in October 2023, the exemption amount was doubled retroactively for decedent’s dying on or after January 1, 2023.
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