The federal estate tax can significantly erode your legacy because it carries a 40 percent maximum rate. Fortunately, there is a pretty hefty estate tax exclusion that can be used to transfer a certain amount before the tax would kick in.
In Connecticut where we practice, there is also a state-level estate tax to contend with, and it has the same exclusion.
We will provide the details in this post, and we will start with a chronology of the changes that have been made to the exclusion over recent years.
Past Tax Reform Acts
The estate tax parameters can be changed via legislative mandate, and tax reform acts tend to come down the pike under new presidential administrations. In 2009, the exclusion was $3.5 million, and the top rate was 45 percent.
There was a provision within the Bush tax cuts that completely repealed the estate tax for the entire 2010 calendar year. The provision was scheduled to sunset at the end of that year, and if no additional legislation was passed, the exclusion would have been reduced to $1 million.
This never came to pass because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was enacted. It established a $5 million federal estate tax exclusion with a 35 percent maximum rate.
There was an inflation adjustment the following year that brought the exclusion up to $5.12 million, and at the end of that year, the American Taxpayer Relief Act of 2012 was signed into law. Under its terms, the exclusion remained the same, and the rate of the tax was increased to 40 percent.
Tax Cuts and Jobs Act
These parameters stayed constant until the Tax Cuts and Jobs Act was enacted in 2017. A provision contained within this act dramatically increased the exclusion. It was set at $11.18 million for 2018, and there have been inflation adjustments since then. In 2024, the exclusion is $13.61 million.
This measure is going to sunset or expire at the end of 2025. In 2026, the exclusion will go back down to the 2017 level of $5.48 million indexed for inflation.
Rules for Married Couples
There are a couple of important details that apply to the impact of the estate tax on married couples.
The exclusion was made portable when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted. Portability in this context defines the ability of the surviving spouse to use the exclusion that was earmarked for their deceased spouse.
This feature has remained intact ever since then, so a surviving spouse would have two exclusions to utilize.
Even more importantly, there is an unlimited marital estate tax deduction. You can leave any amount of money to your spouse tax-free, as long as your spouse is a citizen of the United States.
Gift Tax
The obvious reaction to the estate tax would be lifetime gift-giving, but this is not the solution, because there is a gift tax that is unified with the estate tax. Your available exclusion would be reduced by the value of taxable gifts that you give during your life.
However, there is an additional gift tax exemption that you can use to give as much as $18,000 to any number of people in a given year free of federal transfer taxes. Since each person is allotted this exemption, if you are married, you and your spouse could give up to $36,000 to an unlimited number of gift recipients annually.
In addition to the $18,000 per year, per person exclusion, there is an educational gift tax exemption. If you want to pay school tuition for students, you will not be taxed for your generosity.
There is a similar exclusion that allows you to pay medical bills for others in a tax-free manner, and this extends to the payment of health insurance premiums.
On the state level, there are 12 states with estate taxes. Connecticut is the only one with a gift tax as well, so this is another consideration.
Schedule a Consultation!
Today is the day for action if you are going through life without an estate plan, and we can also help you adjust your existing plan if revisions are necessary. You can schedule a consultation at our Glastonbury or Westport, Connecticut estate planning offices if you give us a call at 860-548-1000, and can fill out our contact form if you would like to send us a message.
Mr. Karpe is licensed to practice law before the courts of the States of Connecticut and Colorado, the U.S. District Court for Connecticut, the U.S.District Court for Colorado, the United States Supreme Court, and the U.S. Tax Court. He is a member of the Connecticut and Hartford County Bar Associations as well as the Estate and Probate Section of the Connecticut Bar Association. In addition, he is a member of the American Academy of Estate Planning Attorneys, the National Academy of Elder Law Attorneys and Planned Lifetime Assistance Network of Connecticut.