Gift and Estate Taxes: An Overview of Annual and Lifetime Exemptions

by Apr 19, 2024All, Estate Planning, Taxes

Estate and Gift Tax Overview

Whether planning for the future with an estate plan or considering giving wealth to others, the laws around estate and gift taxes are important to consider. This article summarizes federal estate and gift tax exemptions and potential changes to be aware of in 2026. 

Estate and gift taxes apply to transfers of wealth, including cash, stock, real estate, business interests, and other assets. Taxes are triggered when a person transfers wealth while alive or leaves it to heirs after they pass. The gift tax rate is progressive from 18-40% in 2024, topping at 40% for gifts exceeding the lifetime gift and estate exemption by over $1M. Unlimited wealth can be transferred tax-free to a spouse unless they are not a US Citizen in which case it is limited to $185,000 per year in 2024. There are both annual and lifetime tax exemptions for transfers to others.

Annual Exemption

The IRS sets annual gift tax exclusions that allow individuals to give up to $18,000 in 2024 ($36,000 for married couples) per person to an unlimited number of people. Generally, the recipient also owes no taxes on the gift and isn’t required to report it on their tax return. 

For example, imagine a couple wanting to provide four individuals the maximum excludable amount in 2024. They could give $36,000 to each, totaling $144,000 gifted with no tax implications. If they chose, they could continue giving up to the maximum annual exemption amount each year with no tax consequences. 

Donors who give more than the annual exemption amount in any given year must file a Gift Tax Return Form 709. The excess won’t be taxed but will be subtracted from a separate bucket, the lifetime exemption.

Lifetime Exemption

The lifetime exclusion amount is the total amount of a deceased person’s estate that is exempt from estate tax when passed to the estate’s beneficiaries. In 2024, the lifetime gift and estate tax exemption amount is $13.61M for individuals or $27.22M for married couples. Any amount gifted in excess of the annual exemption amount is subtracted from the lifetime exemption, and any lifetime exemption amount left after death is applied to the donor’s estate tax. 

Consider the couple mentioned above now giving $40,000 to each individual in 2024. The $4,000 per person above the maximum exemption of $36,000 means that the couple’s lifetime exemption amount will decrease by $16,000, leaving them with a lifetime exemption of $27.06M. Any year during which the couple gives more than the annual exemption amount, their lifetime exemption will decrease accordingly. For married couples, if one spouse passes away, their $13.61M lifetime exemption may be passed on. The annual and lifetime exclusions provide opportunities to transfer assets while avoiding taxes, with annual exemptions affecting yearly giving and any remaining lifetime exemption applying to the estate after the owner passes.

Generation-Skipping Transfer Tax

In the case that grandparents are planning to give to their grandchildren, others related to them by blood, marriage, or adoption more than one generation younger than the donor, or any unrelated individual more than 37.5 years younger, the Generation-Skipping Transfer Tax (GSTT) would apply. The GSTT has annual and lifetime exclusion amounts equal to the gift and estate tax exemptions, though they are separate limits. 

The gift can be double taxed if a donor gives over the exclusion amount. Gifts beyond the exemption would be subject to the flat 40% GSTT and gift taxes on the amount in excess of the exemption plus GSTT taxes paid. This was set in place to avoid a loophole whereby grandparents give directly to a grandchild to avoid paying the gift tax twice, once to the parent and later the parent’s gift to the grandchild. Utilizing the 529 superfund rule is an additional route to give a significant amount to a grandchild. This allows gifts 5x the annual exemption, totaling $180,000 per child gifted by the grandparents. 

Potential Upcoming Changes

The Tax Cuts and Jobs Act (TCJA), established in 2017, is scheduled to expire in January 2026. Congress could extend the provisions, but these changes may be on the horizon. Under this change, the lifetime exemption amount would decrease to pre-TCJA levels, adjusting for inflation, which is expected to be around $7M for individuals or $14M for couples. 

For example, if a couple passes away in 2024 with a net worth of $15M, they would pay no estate tax due to their combined exemption of $27.22M. However, if the couple passes away in 2026 with a $15M net worth and the combined exemption is lowered to $14M, this would create approximately $345k of estate taxes. While the window of opportunity to take advantage of the elevated lifetime exemption could be closing, substantial gifts can still be made before January 2026 to reduce a taxable estate without the risk of that gift being clawed back after the sunset of the TCJA. 

Potential planning strategies to consider include continuing to give at or below the annual exemption amount or moving funds into a trust. With the help of your advisor and estate planning attorney, an estate planning strategy can be set in place based on your unique situation.


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