No one really wants to think about paying taxes, but taking steps today may help reduce the amount of taxes you or your heirs may pay later.
A lot has changed in recent years regarding estate taxes. Depending on your situation, these changes could affect how much you leave as a legacy, and more changes could be on the horizon. Additionally, even with no changes to the current laws, many provisions of the 2017 Tax Cuts and Jobs Act are scheduled to sunset at the end of 2025.* That's why it's important to review your strategy regularly.
When it comes to making these decisions, we believe a team approach is best. Your financial advisor can work with you and your legal and tax professionals to help ensure your strategy reflects your current wishes as well as current tax laws.
Below are some highlights of current federal tax laws that are important to know if you are concerned about the taxes your estate could pay.
Note: If either you or your spouse is not a U.S. citizen, speak with your estate-planning attorney to determine what estate tax planning options might be available to you.
What to know about estate, inheritance, gift, and generation-skipping transfer taxes
Federal estate taxes
In 2024, an individual can pass up to $13.61 million at their death ($27.22 million for a married couple) before paying any federal estate tax. The exclusion amount is adjusted annually for inflation. If there are no legislative changes, those amounts are scheduled to be reduced by half after 2025 pursuant to the 2017 Tax Cuts and Jobs Act.
State estate and inheritance taxes
Along with federal taxes, some states have their own estate or inheritance taxes. So, while your estate may not be subject to federal estate tax, your estate or heirs may be subject to state taxes upon your passing. Twelve states and the District of Columbia have estate taxes that have varied exemption levels and tax rates. Estate taxes are assessed against the estate of the deceased individual. In contrast, inheritance taxes are assessed against the individual receiving the inheritance. A few states have an inheritance tax with rates that tend to vary based upon the relationship of the recipient to the deceased.
Discuss with your estate-planning attorney whether your state of residence or the location of any assets might subject you to state estate or inheritance taxes.
Gift taxes
The gift tax exclusion is coupled with the estate tax exclusion, so it’s also $13.61 million for 2024. Therefore, you may be able to gift up to $13.61 million during your lifetime free from federal gift tax. It’s important to remember, though, that any gifts made during your lifetime will reduce your estate tax exclusion amount dollar for dollar. The gift tax exclusion is also scheduled to be reduced by half after 2025.
Generation-skipping transfer (GST) taxes
GST tax may apply when assets are transferred to "skip" people (generally a relative more than a generation from you (such as a grandchild) or an unrelated individual at least 37.5 years younger than you). The GST tax exclusion in 2024 is $13.61 million for all individuals (adjusted for inflation annually). For any taxable transfer, the GST tax rate is 40%, which may be in addition to any other estate/gift tax liability due. Unlike estate and gift tax exemption, there is no "portability" of a spouse's unused GST exclusion amount. You should discuss with your estate-planning attorney if you plan to leave assets to a skip person. Similar to the federal estate tax exemption, the GST exemption is scheduled to be reduced by half after 2025.
Depending on your assets and situation, your estate may or may not be subject to tax. If needed, however, there are strategies you can put into place that may help minimize the effects of these taxes.
Strategies for estate tax planning
Consider these estate-tax strategies when planning your estate.
Review your existing estate plan
It's important to regularly review your estate plan to confirm that it aligns with your goals. Updates could be necessary due to new laws (such as changes to the estate tax exemption) or your circumstances (including changes to your net worth).
We recommend reviewing your plan every 3-5 years or when major life changes occur, which might include births, deaths, marriage, divorce, incapacity or moving to a new state. You should also regularly review how your assets are titled and how you've set up any beneficiary designations or payable on death (POD)/transfer on death (TOD) provisions.
These reviews can help ensure your estate plan is designed to meet your goals and that all aspects are aligned to work together properly. If your plan no longer suits your goals or other circumstances necessitate a change, work with your estate-planning attorney, financial advisor and tax professional to find strategies that will suit your needs.
Compare portability to credit shelter trust planning
Portability means that when a person dies, their surviving spouse may retain the deceased spouse's unused exclusion amount. For example, if one spouse dies, the surviving spouse may be able to combine the deceased spouse's unused $13.61 million exclusion with their own $13.61 million exclusion, allowing the survivor to use the combined $27.22 million exclusion without planning for it in advance. If you're interested in using this option in your planning or if your spouse has passed away within the last five years, you should talk with your estate-planning attorney or qualified tax advisor about the advantages in filing for portability and to determine whether you meet certain tax-filing requirements.
Although in some situations portability may provide significant advantages to married couples over the long term, considering a credit shelter trust could also have benefits for you and your family.
Credit shelter trust (CST) planning is a method of spousal tax planning that could be included in your revocable trust or will. It generally provides that upon the first spouse's death, the CST is funded with the deceased spouse's assets up to the applicable exemption amount (most often that might be the federal exemption but CSTs can be used to plan for state estate taxes). Any of the deceased spouse's assets not used to fund the CST might then pass to the surviving spouse outright or in trust and can rely upon the unlimited marital deduction so that no estate tax is due at the first spouse's death.
Portability
- Portability allows use of the deceased spouse’s unused exclusion amount.
- The surviving spouse may have full access and control over all the assets.
- Growth of the assets may be subject to estate taxes when the surviving spouse dies.
- Assets can be subject to creditor claims.
- Assets may be subject to state estate taxes.
- All assets, including those from the first spouse to die, generally get a full step-up in cost basis (or readjustment of the value) at the surviving spouse’s death.
- Portable exclusion does not apply to federal GST tax.
Credit shelter trust
- Without portability, if the deceased spouse’s estate tax exemption can’t be used in full, the unused exemption could be lost.
- The spouse who sets up the trust designates its beneficiaries. The surviving spouse and/or other beneficiaries may receive benefits from the assets in the trust during their lifetimes.
- Growth of assets in the trust is generally not subject to estate tax upon the death of the surviving spouse.
- Assets are typically protected from creditor claims.
- Assets may not be subject to state estate taxes.
- Assets do not get a step-up in basis at the surviving spouse’s death.
- With proper planning, assets may not be subject to federal GST tax.
Lifetime gifting
For people who can afford to part with their assets, lifetime gifting can be an effective strategy to move assets, and the future appreciation and income stream, to beneficiaries. With the ability to shift $13.61 million, you can transfer significant assets during your lifetime. Gifting during your lifetime reduces, dollar for dollar, the estate tax exclusion.
Note: If you gift during your lifetime, the cost basis in the assets transfers to the beneficiary which could cause income tax consequences for them down the line. Also, the lifetime gift credit reduces, dollar for dollar, the estate tax exclusion.
Annual gifting
Annual exclusion gifts allow you to gift up to $18,000 to any individual per year without using any of your lifetime gift and estate tax exemption. In 2024, married couples may gift up to $36,000 if they agree to gift splitting. Annual gifting in amounts greater than the annual exclusion decreases your taxable estate, thereby reducing your potential estate taxes. The annual exclusion is adjusted for inflation over time.
Charitable giving
Giving to charities during your lifetime can help potentially reduce your taxable estate and it may create an income tax deduction. If you choose to leave assets to a qualified charity when you die, you may receive a dollar-for-dollar deduction on your estate tax return for the value of those charitable gifts.
Advanced planning strategies
There are many advanced planning strategies that could help you meet your goals while helping to mitigate estate taxes. For example, an irrevocable life insurance trust (ILIT) is an irrevocable trust designed to hold life insurance on your life. Structured properly, the trust's assets, including the death benefit from the life insurance, may be excluded from your taxable estate at death. This strategy is often used when your estate might need liquid assets for taxes or maintenance of real estate or a business. Other advanced planning strategies include intentionally defective grantor trusts (IDGTs), spousal lifetime access trusts (SLATs), qualified personal residence trusts (QPRTs), grantor retained annuity trusts (GRATs) and family limited partnerships (FLPs). Discuss your goals and specific situation with your estate-planning attorney to determine if any of these strategies might be appropriate for you.
For each of these strategies, it’s important to work closely with your tax and legal advisors, who may offer other options to address estate tax concerns.
Taxes are just one reason you should create an estate and legacy plan. Having a strategy is about much more than money. Think about the things that are most important to you: your family, your children, charities, your business.
A properly planned estate strategy gives you control over how to provide for these, both financially and personally, once you are no longer able to do so yourself.
