Estate Planning Tax Considerations

Existing estate plans should be reviewed every 3 – 5 years to determine if your current plan continues to minimize tax liabilities, maximizes asset protection and modern tax planning, and effectively accomplishes your goals under the constantly evolving tax rules.

2024 TAX LAW SUMMARY

The current tax numbers in effect for 2024 are below. The Applicable Exclusion Amount (AEA), also known as the Unified Credit, is the amount each person can have in their estate at death or give away during life without incurring any tax consequences. The 2017 Tax Cuts and Jobs Act increased AEA amounts until December 31, 2025.  On January 1, 2026, the AEA will return to the previous amount, which is $5 million indexed for inflation from 2010.  This is estimated to be around $7 – $8 million at this time.

  1. Annual Exclusion from Gift Tax.  There is an annual exclusion from gift taxes of $18,000 per person.  Therefore, you may give any one person $18,000 (or $36,000 if you and your spouse are giving a joint gift to one person) without reporting it on a gift tax return.
  2. Estate Tax Exclusion. You are allowed to give away, in life or at death, up to $13.61 million per person and $27.22 million per married couple before any tax will apply.
  3. Portability. Portability allows a surviving spouse to apply or “port” any unused estate tax exclusion from their deceased spouse’s estate to his or her own estate.  For example, if a husband dies owning $5 million in assets, he uses $5 million of the $13,610,000 he is entitled to upon his death without owing taxes.  As the surviving spouse, the wife receives a large inheritance of $30 million after her husband’s death.  Wife can apply her $13,610,000 estate tax exclusion, plus her late husband’s remaining $8,610,000 exclusion to avoid estate tax on $22,220,000 and without further planning, would owe estate tax on the remaining $7,780,000.
  4. Unified Tax Exclusion.  The estate, gift and generation skipping transfer taxes are unified, so if the entire exclusion amount of $13.61 million is gifted during life, assets in excess of that amount will be taxed at death.  The exclusion amount is increased every year for inflation.
  5. Tax Rates.  The estate, gift and generation skipping transfer tax rate is 40% for any amounts over $13.61 million per individual.
  6. Step Up (or Down) in Basis Upon Death. There is a step-up (or down) on the tax basis of most assets at death.   A “step up in basis” at death means all property titled in the name of the decedent will go from having a cost basis (the property’s original cost / price) or adjusted basis (such as with depreciated property) up or down to the fair market value on the day of death.  For example, if a house costs $500,000 in 2019 (the basis) and sells for $600,000 in 2022, there is $100,000 in gain, possibly subject to capital gains tax.  If decedent owns the property at death, the basis value gets “stepped up” to $600,000 without gain recognition. This allows heirs of an estate to inherit property without a tax.  If sold during life, the appreciation may be taxed. Appreciation of an asset after death is taxable to the person who inherits the asset
  7. Marital QTIP Trusts vs. Family Trusts. A Marital Trust, with the spouse as the only beneficiary and a required annual income distribution, is a Qualified Terminable Interest Property (“QTIP”) Trust, and assets receive a step up in basis at the death of the spouse.  Trusts with beneficiaries other than the spouse (such as children) cannot qualify as a QTIP Trust and trust assets do not get the benefit of a step up in basis.  A testamentary General Power of Appointment may be granted to get the step up in non QTIP Trusts by a Trust Protector.