Client Alert – 2024 Estate and Gift Tax Exemptions

With a new year comes updated exemptions for estate tax exclusion and gift tax for 2024.

What is the “estate tax exemption” and where is it going in 2024?

The estate tax exemption refers to the value (or sum) of non-charitable bequests that can pass tax-free to someone other than your spouse upon your death, reduced by the cumulative amount of lifetime gifts you have reported to the IRS. For 2024, the federal estate tax exemption will increase from $12,920,000.00 to $13,610,000.00. This increase is tied to inflation.

A married individual has an unlimited exemption to a surviving spouse and, under certain conditions, upon the surviving spouse’s death, he/she can combine his/her exemption with whatever unused exemption remains from his/her predeceased spouse (called “portability”).

What is the impact of lifetime gifts on your estate tax exemption?

Your estate tax exemption will be limited by the cumulative amount of annual lifetime gifts that you have made. However, the “gift exemption” is the amount you can gift annually (to someone besides a spouse or charity) without reporting the gift to the Internal Revenue Service.  Importantly it is only these reported gifts that reduce your estate tax exclusion.

For example, if you have reported $100,000.00 in lifetime gifts to the IRS, your available estate tax exemption will be reduced by $100,000.00. However, if you have carefully plotted your cumulative gifting so that each annual gift comprising the cumulative $100,000.00 in lifetime gifts was under the annual exemption and you were not required to report the gift, your exemption would not be reduced by your lifetime gifting.

What is happening to the federal gift exemption in 2024?

For 2024, the federal gift tax exemption will increase from $17,000.00 to $18,000.00. This means that each individual can gift up to $18,000.00 to as many recipients as he/she would like without the gift reducing their lifetime estate tax exemption (and without reporting the gift by filing a gift tax return with the IRS).

Many couples utilize their annual gift exemption amount to make yearly tax-free gifts to children and grandchildren (or to 529 plans or trusts for their benefit) without reducing their estate tax exemption.

Remember that only reported lifetime gifts reduce the estate tax exemption and a gift that is $18,000.00 or under in 2024 need not be reported.

What about state estate tax exemptions?

Maryland and DC residents should bear in mind that, although the federal estate tax exclusion is extraordinarily high, both Maryland and the District of Columbia assess state estate tax.

Maryland’s estate tax exclusion remains $5,000,000.00. Like federal estate tax, under certain circumstances, a surviving spouse can “port” their deceased spouse’s unused exemption to increase their estate tax exemption to up to $10,000,000.00.

The District of Columbia estate tax exclusion will increase from $4,528,000.00 to a yet-to-be-determined amount because it too is tied to the rate of inflation. However, District of Columbia does not recognize the doctrine of “portability”.  Therefore, a surviving spouse will only receive his/her exemption without having available their deceased spouse’s unused exemption.  It may be important from an estate planning perspective to make sure that each spouse has a plan to utilize his/her full exemption upon his/her death.

What does the future hold?

Buckle up for the 2024 election! Because we really don’t know what the future holds for estate tax and nearly everything will depend upon the outcome of the 2024 election on the White House and Congress.

If nothing changes, come December 31, 2025, the federal estate tax exemption will automatically drop to the 2017 exemption ($5,000,000.00), but indexed for inflation since 2017.  Most analysts predict the exemption would be approximately $7,000,000.00 to $7,500,000.00.  Portability would still be available.

However, depending upon the outcome of the election, the federal estate tax exemption could be retained at current levels or even abolished.

There is, however, the possibility for a substantial reduction in the estate tax exemption within the next 24 months and our clients should watch our newsletter for updates as the landscape becomes more certain. Clients with possible estate tax exposure may need to take urgent action in 2024 or 2025 — or may need to take no action at all.

If you’d like to chat about your estate plan, please contact Jeremy Rachlin at (301) 656-1177, or jrachlin@bulmandunie.com to schedule a discussion.