On the estate planning front, 2023 wound down fairly quietly. However, we anticipate a busy 2024, and an even busier 2025, as the massive estate tax changes come closer to reality. Before we discuss this, here is an overview of the 2024 inflation-adjusted federal gift and estate tax exemptions:
- Basic Exclusion: For 2024, the basic estate, gift and generation-skipping exclusion amount increased from $12,920,000 to $13,610,000 per person, a 5.34% increase. The basic exclusion represents the amount that can be transferred, during lifetime or at death, free of estate tax, gift tax or generation-skipping transfer (GST) tax, as the case may be. This represents the base exclusion amount of $10,000,000, plus an inflation adjustment. If at the end of 2023 you already gifted away your entire exclusion, you may now gift an additional $690,000 (or $1,380,000 if you are married). The estate, gift and GST tax rates remain at a flat 40%.
- Exclusion for Lifetime Gifts to Non-Citizen Spouse: Lifetime gifts to a spouse who is a U.S. citizen are not subject to gift tax regardless of the amount. Lifetime gifts to a spouse who is not a U.S. citizen are subject to gift tax to the extent the gifts exceed the authorized exclusion in any year. For 2024, this exclusion is $185,000.
- Annual Gift Tax Exclusion: Historically, it has taken years for the annual exclusion amount for gifts of present interests to adjust, but 2024 represents the second year in a row with an adjustment. In 2024, the annual exclusion is $18,000 per person, up from $17,000 per person. If structured correctly, so-called “annual exclusion” gifts do not count against the larger exclusion discussed above.
If you are interested in reading more about these and the many other 2024 tax adjustments, take a look at IRS Revenue Procedure 2023-34.
Barring an unlikely display of unity in Congress over the next two years, on January 1, 2026, the $10,000,000 base exclusion amount will be reduced to $5,000,000, plus an inflation adjustment. This reduction is referred to as the “sunset.” After sunset, it is estimated that the inflation-adjusted exclusion amount will be in the range of $7,000,000 to $7,500,000 per person. For many of our Bay Area clients, this represents a substantial tax increase and warrants discussion about gifting the exclusion amount now, before half of it is lost at the end of 2025 – we refer to this as “use it or lose it.”
To “use it,” you must gift more than the projected 2026 exclusion amount. To simplify the numbers, assume your pre-sunset exclusion amount is $14,000,000 and your post-sunset exclusion amount is $7,000,000, and let us call the $7,000,000 portion of the exclusion that will disappear on January 1, 2026, the “bonus exclusion.” If you gift $8,000,000 today, you will have used only $1,000,000 of the bonus exclusion, leaving $6,000,000 on the table; if you gift $10,000,000 today, you will use $3,000,000 of the bonus exemption, leaving $4,000,000 on the table. Thus, to take advantage of the full bonus exclusion in this example, you must give away $14,000,000. “Use it or lose it” obviously involves exceptionally large gifts. It is important to also note that with this level of gifting, there will be no exclusion amount to apply against your estate at your death.
If you are tax-motivated, wealthy and interested in this concept, we recommend that you first ask your asset management team or your CPA to perform a Monte Carlo simulation for you. By considering thousands of possible outcomes, this simulation can predict the likelihood that your long-term financial goals will still be accomplished if you gift your exclusion amount today. In other words, it confirms whether or not you can afford to give millions of dollars away today. In our opinion, no amount of future estate tax savings is worth jeopardizing your financial well-being and security.
Once you confirm that substantial gifting works for you, contact us so we can help you decide which assets are good candidates for gifting and which of the many gifting techniques is best for you. Ideally, your asset management team and CPA are involved in these discussions as well. Complex gifting takes time – not just our time to advise and prepare documents, but appraisals may be required or, in a multi-step transaction, the steps may need to straddle two tax years. Past experience tells us that that we will not have time to accommodate all of our clients with this planning. We understand that 2026 seems distant, but it is not too soon to begin the process – act now.
Even if you decide that gifting the exclusion amount is not for you, the 2026 sunset warrants a review of your estate plan and a discussion of related issues, such as estate tax liquidity planning.