As announced by the IRS, the key 2024 federal transfer tax exemption amounts per taxpayer are as follows:
- Estate & Gift Tax Exemption: $13,610,000
- GST Tax Exemption: $13,610,000
- Annual Exclusion: $18,000
Estate, Gift and GST Tax Exemption
Generally, the Estate and Gift Tax Exemption is used to determine the aggregate value of the taxable gratuitous transfers that a person can make without incurring a transfer tax (e.g., gifts and bequests to heirs, trusts for heirs, etc.). The Estate and Gift Tax Exemptions are tied together by the tax laws, such that a taxpayer’s lifetime gifts are taken into account in determining the amount of Estate Tax Exemption remaining that can be utilized to pass assets tax free at a person’s death.
Basically, under current law, taxable transfers (during life and at death) are taxed at the rate of 40%, after taking into account all available exemptions (and prior exemption used) and deductions.
The generation-skipping transfer tax is a separate and additional 40% transfer tax that applies on certain transfers to “skip persons” (e.g., grandchildren). While the complex intricacies of the generation-skipping transfer tax regime are beyond the scope of this blog post, it is important to keep in mind that this tax has its own separate exemption per taxpayer, the use of which is also separately tracked, but the starting amount of which is the same number as the starting amount for the Estate and Gift Tax Exemption (i.e., $13,610,000 in 2024).
Note that the GST Tax Exemption can serve as a powerful planning tool for multigenerational wealth, especially when planning with appropriately structured trusts.
Annual Exclusion
The Annual Exclusion is the total value of qualifying gifts a donor may exclude from the calculation of the donor’s taxable gifts per year, per donee. To utilize the Annual Exclusion, the donor can make a qualifying transfer to each recipient up to this amount each year (i.e., $18,000 in 2024), without having to use any of the exemptions mentioned above.
With the consent of the non-donor spouse, a donor spouse may “split gifts” to allow the donor to gift up to twice this exclusion amount. Generally, to qualify as an annual exclusion gift, the property must be a present interest transfer (e.g., a gift of cash) directly to the recipient.
Although beyond the scope of this blog post, gifts made in trust and gifts of non-cash assets, such as securities, real property, and closely-held business interests, may qualify as present interest gifts if structured correctly and certain conditions are satisfied.
Further, if additional special technical rules are followed, certain transfers in trust may also qualify to exclude transfers subject to GST tax and allow the transferor to preserve available GST Tax Exemption.
Scheduled Sunset of Bonus Exemptions
While the amount of the Estate, Gift and GST Tax Exemptions are now at their highest levels in history, the provisions of the tax law that created these temporary bonus exemptions are currently scheduled to expire on December 31, 2025, after which the Estate, Gift and GST Tax Exemptions will effectively be cut in half.
According to current estimates, this would mean that in 2026 the Estate, Gift and GST Tax Exemptions would be reduced to roughly $7,000,000 for each taxpayer, unless Congress takes action to extend these provisions or otherwise changes the laws (which is always a possibility!).
