Increased Annual Gift Tax Exclusion

On January 1, 2024, the gift tax annual exclusion increases to $18,000 per person (up from $17,000 per person in 2023).  The inflationary increase allows a married couple to give a combined $36,000 to each beneficiary without reduction of their lifetime gift and estate tax exclusions.

If you intend to use your 2023 gift tax annual exclusion, you must do so prior to December 31, 2023.

PLANNING TIP: Optimize gift tax annual exclusions.  Consider making your 2024 annual exclusion gifts in January 2024 rather than later in the year.  Since the appreciation of the gift is removed from your estate for estate tax purposes, generally speaking, the earlier you make the gift the better.  Also, if you plan to give monies to an irrevocable trust, don’t forget to remind the trustee to send the Crummey letters!

Increased Lifetime Gift, Estate Tax, and Generation-Skipping Transfer Tax (“GST”) Exemptions

As of January 1, 2024, a person may give $13,610,000 during life or at death (up from $12,920,000 for 2023), less prior taxable gifts, without incurring estate tax. Therefore, in 2024, a married couple can give $27,220,000 during life or at death.  These are the largest exemptions in the history of the estate and gift tax.  To put things in perspective, in 1997, the estate and gift tax exemption was $600,000!  Importantly, the gift tax, estate tax, and generation-skipping transfer tax exemptions are all scheduled to be cut in half on January 1, 2026, which could bring the reduced exemptions to around $7,000,000 per person. Married couples will still be able to combine their exemptions.

PLANNING TIP:  Avoid Wasting Exemption.  If you plan to live past January 1, 2026, and do not want to “waste” up to $7,000,000 of gift, estate, and GST exemptions scheduled to sunset on January 1, 2026, consider using your remaining gift and GST tax exemptions prior to January 1, 2026.  The US Treasury and IRS have confirmed that, in general, the government cannot “clawback” at death any gift and GST exemptions used prior to January 1, 2026.  Of course, before making such large gifts, careful financial analysis must be done to ensure such transfers will not affect your lifestyle and financial security.  The good news is that there are estate planning techniques to help protect against “over-gifting” including trusts designed to give direct access to a spouse and indirect access to the donor.

PLANNING TIP:  Modifying Irrevocable Trusts to Obtain Income Tax Basis Step-Up.  With such high exemptions, most people do not have an estate large enough to cause an “estate tax problem”; however, when exemptions were much lower, many people created irrevocable trusts for spouses and children to reduce estate tax liability. Unfortunately, because of increases in the estate tax exemption amount, such planning may not have the intended benefit and may cause future negative income tax consequences by not allowing a stepped-up income tax basis of trust assets at the beneficiary’s death.  Fortunately, there are planning techniques to help secure the often very valuable income tax basis step-up.  If you are a beneficiary of an irrevocable trust, it should be reviewed with this income tax planning in mind.  Prime candidates for this type of planning are surviving spouses with existing “Bypass,” “Exemption,” or “Credit Shelter” trusts.

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