A New Year is upon us, it is an election year, and a rollback of the federal estate, gift, and generation-skipping transfer taxes is scheduled for the not too distant future. State and federal estate and gift taxes are an important consideration for estate planning in the United States. Now is an opportune time to consider leveraging gifting plans while exemptions against the federal estate and gift tax are at an all-time high.
Federal Estate and Gift Tax Exemptions
Now is the time to start considering use of the federal gift and estate tax exemption to ensure enough time for thoughtful planning before a potential rollback of the federal gift and estate tax exemption. The federal estate and gift tax lifetime exemption reflects the total amount any US person may transfer to another person or persons during life or at death, combined, without owing federal gift or estate tax. The amount of gifts made during life reduces the amount of the federal estate tax exemption available to protect a taxpayer’s remaining estate from federal estate tax at the death of the transferor (in all events, transfers to US citizen spouses and qualified charitable organizations are not generally subject to federal gift and estate tax).
Under current law, the federal gift and estate tax exemptions adjust annually for inflation. One benefit to continued high inflation in 2023 is that the federal gift and estate tax exemption increased from US$12,920,000 per taxpayer in 2023 to US$13,610,000 per taxpayer in 2024. In 2024, married couples now have a combined total federal gift and estate tax exemption of US$27,220,000. For married couples who already maximized their federal gift and estate tax exemption in 2023, an additional US$1,380,000 of federal gift and estate tax exemption is now available. Any transfers, in total, during life or at death in excess of the federal gift and estate tax exemption are subject to a 40% federal gift or estate tax.
Generation-Skipping Transfer Tax
In addition to federal gift and estate tax, federal law imposes a generation-skipping transfer tax (GST Tax), also at a rate of 40%, on certain transfers of wealth to individuals two or more generations below the transferor. This tax is intended to discourage taxpayers from avoiding the tax generally imposed at each generation level by imposing a second tax when the taxpayer’s gift or bequest skips a generation. Federal law provides for a lifetime exemption from the GST Tax for wealth transfers that would otherwise be subject to the tax. In 2024, the federal GST Tax exemption increased along with the federal gift and estate tax exemption to US$13,610,000 per taxpayer (US$27,220,000 for a married couple).
Possible Rollback of High Federal Gift, Estate and GST Exemptions
For individuals with a net worth in excess of US$13,610,000, or married couples with a combined net worth in excess of US$27,220,000, there may be limited time to take advantage of these high federal exemptions. Under the 2017 Tax Cuts and Jobs Act, the base amounts of the lifetime federal gift, estate, and GST Tax exemptions were doubled, but this increase has not been made permanent. After 2025, this “doubling” of the exemptions will expire. The then-existing exemptions effectively will be cut in half, unless Congress extends or modifies the exemptions before then. Extending or making permanent the current federal exemption amounts would require an affirmative act of Congress. As a result, taxpayers may wish to consider strategies through lifetime gifts outright or in trust to lock in the current higher exemptions (including the annual inflation adjustments) before the end of 2025, when the exemptions may be reduced by one-half.
Washington State Estate Tax Exemption
Washington has a separate estate tax that should be taken into consideration for Washington residents and non-residents who own real property or tangible personal property within the State of Washington. In 2024, the Washington state estate tax exemption remains at US$2,193,000 per taxpayer—the same rate as 2023. A Washington resident can leave this exemption amount, in total, at death to beneficiaries without incurring a Washington state estate tax (there is no Washington state estate tax on transfers to US citizen spouses or qualified charitable organizations). The assets of one’s estate in excess of this exempt amount are taxed by the state at graduated rates from 10% to 20%. Generally, real estate and tangible personal property located outside of Washington are not subject to tax. Conversely, for estates of nonresidents of Washington, the tax generally applies only to real estate and tangible personal property located within Washington. The Washington state estate tax is calculated separately from the federal estate tax.
Unlike federal law, Washington does not impose a gift tax on lifetime gifts; and current gifts do not reduce the amount of the Washington state estate tax exemption available at death. Consequently, making lifetime gifts is often an effective strategy to reduce the value of a taxpayer’s taxable estate for purposes of the Washington state estate tax.
The Washington law that provides for the state estate tax exemption to increase based on inflation is tied to a consumer price index that no longer exists. As a result, the Washington state estate tax exemption has not risen since 2018. There have been multiple attempts to update the law to tie the inflation adjustments to the new consumer price index, but none has passed to date.
Washington does not impose a GST Tax.
Annual Exclusion Gifting
Clients also may wish to consider leveraging the annual exclusion for gifting. Each taxpayer can make annual gifts of up to US$18,000 per recipient in 2024 to an unlimited number of individuals free from any gift tax. For a married couple splitting gifts, this allows for annual tax-free gifts of up to US$36,000 per recipient. This year the annual gift tax exclusion amount increased from the 2023 annual exclusion of US$17,000 per recipient. Because these gifts are within the annual exclusion amount, the gifts do not reduce the taxpayer’s lifetime federal estate and gift tax exemption (discussed below). These annual exclusion gifts are an effective way to pass wealth to family members or others free from estate or gift taxes as well as reduce one’s asset base that will be subject to estate tax at one’s passing. All gifts made outright can qualify for this annual exclusion, and certain gifts made to a beneficiary in trust also can qualify for the annual exclusion if properly structured.
Under current law, the annual exclusion is renewed each year, but one cannot apply last year’s annual exclusion amount to this year’s gifts. For persons planning to make annual exclusion gifts this year, the gifts must be completed by 31 December 2024.
Act Now
Because lifetime transfers are often more effective at reducing estate taxes than transfers that occur upon one’s passing, the large increase in the lifetime federal exemptions this year offers opportunities for further and effective estate planning, particularly for families that have already made significant lifetime taxable gifts. In addition, because Washington state imposes no gift tax, those lifetime gifts will also remove the assets from the Washington state estate tax altogether. With the future of federal gift and estate tax exemptions unknown with a rollback of the exemptions currently scheduled, clients are encouraged to consider estate planning opportunities currently available.
