As 2024 approaches, a crucial update from the Internal Revenue Service (IRS) brings changes to the federal estate and gift tax exclusions. This blog post will delve into these changes and explore various strategies to minimize the negative impact.
Understanding the 2024 Exclusion Increases
In a significant move, the IRS has raised the unified exclusion amount for estate and gift taxes from $12.92 million in 2023 to $13.61 million in 2024. This increase means individuals can leave more to their heirs without incurring taxes.
Simultaneously, the annual gift tax exemption will also see a rise, moving from $17,000 to $18,000 per gift, per person. This adjustment allows for more generous tax-free gifting without impacting the larger unified exclusion.
The Strategic Role of Portability and Marital Deduction
Estate planning in 2024 will continue to benefit from the concepts of portability and the marital deduction. Portability allows a surviving spouse to use their deceased spouse’s unused exclusion, potentially doubling the tax-free amount a married couple can pass on. The marital deduction remains a potent tool, offering unlimited tax-free transfers between spouses.
Maximizing Gifting to Lower Estate Value
Gifting is a strategic method to reduce the value of an estate. With the increased $18,000 annual gift tax exemption, individuals can effectively lower their estate’s taxable value. Spouses can further enhance this strategy through gift splitting, where a gift by one spouse is considered as being made jointly, effectively doubling the limit of tax-free gifting.
Leveraging Special Exemptions: Tuition and Medical Expenses
Beyond the annual exemption, paying tuition for someone directly to the educational institution is a tax-free option. This exemption applies strictly to tuition, not books, fees, etc.
However, you can also utilize the $18,000 annual exemption for other support aspects like books and living expenses.
The medical exclusion also plays a crucial role. It allows individuals to pay medical bills for others without incurring taxes, and this extends to health insurance premiums.
State-Level Estate Taxes: An Important Consideration
For residents in the 12 states with their own estate taxes, it’s essential to understand that these states often have lower exemption thresholds than the federal level. This being stated, we practice in Connecticut, and in our state, the exclusion mirrors the federal exclusion.
Estate Tax Efficiency Strategies
To optimize estate tax efficiency, consider these strategies:
- Irrevocable Life Insurance Trust (ILIT): An ILIT helps in excluding life insurance proceeds from the taxable estate, reducing the overall estate tax liability.
- Qualified Personal Residence Trust (QPRT): A QPRT lowers the taxable value of your estate by transferring your residence into a trust while retaining the right to live there for a term.
- Generation-Skipping Trust (GST): GSTs are designed to pass assets directly to grandchildren, bypassing the children’s generation and reducing potential estate taxes.
- Charitable Remainder Trust (CRT): A CRT provides a way to donate to charity while receiving income, offering tax deductions and reducing the taxable estate.
- Grantor Retained Annuity Trust (GRAT): GRATs allow for the transfer of appreciated assets to beneficiaries while receiving a fixed annuity, minimizing estate taxes on future asset growth.
Practical Tips for Effective Estate Planning
To make the most of these changes, consider these practical tips:
- Regularly review and update your estate plan to align with the latest tax laws and personal circumstances.
- Work closely with an estate planning professional to tailor strategies that best fit your unique situation and goals.
- Consider the impact of state-level estate taxes if applicable, and plan accordingly.
Conclusion
The 2024 estate and gift tax exclusion changes present expanded opportunities for tax-efficient estate planning. By incorporating strategies like ILITs, QPRTs, GSTs, CRTs, and GRATs, and being mindful of state-level variations, individuals can significantly enhance their estate planning approach.
Take Action Today!
Today’s the day to take action to put a plan in place to facilitate the effective passing of your legacy. You can call us at 860-548-1000 to schedule a consultation at our Glastonbury or Westport, CT estate planning offices, and you can alternately use our contact form to send us a message.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.