What are the Estate and Gift Tax Exemptions for 2024?

Unless Congress acts, regulations that elevated exemptions will expire at the end of 2025, and the federal estate and gift tax exemption will be cut by about half, says the article “Take Advantage Of Increased Gift And Estate Tax Exclusions in 2024” from mondaq.

Those whom the gift and estate tax may impact should speak with their estate planning attorney about using this historically high exemption. Many estate planning strategies can be used to transfer wealth and take advantage of these exemptions efficiently.  I’ve covered this a few times as we approach the exemption, so see here for some ideas:  https://galligan-law.com/gifting-and-estate-taxes/  

In November 2023, the IRS announced increases for gift and estate tax exemptions in 2024, including an increase in the federal gift, estate, and GST (Generation Skipping Tax) exemption and the annual exclusion from gift tax. These changes became effective on January 1, 2024.

The gift and estate tax exemption has increased to $13,610,000 per individual in 2024. If they make good use of a portability election, a married couple could pass $27,220,000 of property. This marks a substantial increase of $690,000 per person ($1,380,000 per married couple) from the prior year.

Generally, gift and estate taxes may be due if a person’s total wealth transfer during their lifetime and at their death exceeds the gift and estate tax exemption, which is why gifting strategies may come into play as we head into next year.

The GST tax exemption increased to $13,610,000 per person in 2024. This tax may be triggered by transfers to or in trust for family members more than one generation younger than the donor. It might also be triggered by gifts to unrelated individuals who are 37.5 years younger than the donor.

The annual gift tax exclusion increased to $18,000 per donor, per gift recipient, and $36,000 per married couple splitting gifts. The annual gift tax exclusion permits individuals to make gifts to any amount of people tax-free every year without being counted against their lifetime gift and estate tax exemption.

An experienced estate planning attorney will explain the time-sensitive opportunities presented by the increases in 2024 in conjunction with the current (yet temporary) exemptions.

Now is the time to consider funding trusts with assets expected to have high growth potential, using a portion of the gift tax exemption while removing future appreciation from the estate.

Reference: mondaq (Dec. 21, 2023) “Take Advantage Of Increased Gift And Estate Tax Exclusions in 2024”

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What Is the Step-Up in Basis?

Many clients are concerned about taxes in their estates.  Some people are concerned with federal estate taxes, although those rules don’t affect too many people.  Capital gains tax and the “step-up” in basis rule apply to almost everyone, and so it is important for clients to be familiar with this rule.

The “step-up” is tax rule which changes the cost basis of an inherited asset, including stocks or property, to its value as of the date of death.   As a result, the beneficiary may receive a reduction in the capital gains tax they must pay on the inherited assets. For others, according to the recent article, “What Is Step-Up In Basis?” from Forbes, it allows families to avoid paying what would be a normal share in capital gains taxes by passing assets across generations. Estate planning attorneys often incorporate this into estate plans for their clients to minimize taxes and protect assets.

Here’s how it works.

If someone sells an inherited asset, a step-up in basis may protect them from higher capital gains taxes. A capital gains tax occurs when an asset is sold for more than it originally cost (subject to some other provisions we won’t worry about here). A step-up in basis considers the asset’s fair market value when it was inherited versus when it was first acquired. This means there has been a “step-up” from the original value to the current market value.

Assets held for generations and passed from original owners to heirs are never subject to capital gains taxes, if the assets are never sold. However, if the heir decides to sell the asset, any tax is assessed on the new value, meaning only the appreciation after the asset had been inherited would face capital gains tax.

For example, Michael buys 200 shares of ABC Company stock at $50 a share. Jasmine inherits the stock after Michael’s death. The stock’s price is valued at $70 a share by then. When Jasmine decides to sell the shares five years after inheriting them, the stock is valued at $90 a share.

Without the step-up in basis, Jasmine would have to pay capital gains taxes on the $40 per share difference between the price originally paid for the stock ($50) and the sale price of $90 per share.

An extremely common example of this is the primary residence.  Clients who live in their home for 40 plus shares may have purchased it for $20,000, only to have it be worth $350,000 now.  Absent the step-up in basis, the beneficiaries might sell the residence after mom dies and would pay capital gains tax on $330,000 worth of growth.  With the step-up in basis, they would sell it for its then present value of $350,000, have a cost basis of $350,000, and therefore no gain on which to pay tax.

Other assets falling under the step-up provision include artwork, collectibles, bank accounts, businesses, stocks, bonds, investment accounts, real estate and personal property, including assets held in a revocable trust. Assets not affected by the step-up rule are retirement accounts, including 401(k)s, IRAs, pensions and most assets in irrevocable trusts.  Cash also has no cost basis, and therefore no step-up.

Now, clients commonly want to make gifts of property.  Giving a gift during lifetime means the original owner does not have the asset at their deaths, and so no there is step-up in basis.  With gifting, the recipient retains the basis of the person who made the gift—known as “carryover basis.” Under this basis, capital gains on a gifted asset are calculated using the asset’s acquisition price.

Say Michael gave Jasmine five shares of ABC Company stock when it was priced at $75 a share. The carryover basis is $375 for all five stocks. Then Jasmine decides to sell the five shares of stock for $150 each, for $750. According to the carryover basis, Jasmine would have a taxable gain of $375 ($750 in sale proceeds subtracted by the $375 carryover basis = $375).

Taking my real estate example, mom decides to transfer the house to two of her children.  She gifts them the property with her $20,000 cost basis, and when they sell the property (pre or post her death), they will be responsible for the capital gains on the $330,000 worth of growth.  I have met many clients over the years who have done this on their own without the advice of an attorney, ironically on the belief they are avoiding taxes.

It is worth noting one other issue.  People refer to it as the step-up because it almost typically is an increase in cost basis.  Inflation makes the present value of assets much more than it was 40 years ago let’s say, but it is possible to have a step-down in basis.  You see this more with stock where an individual bought and sold recently, and then passed in a down market.   On the whole this rule is very taxpayer friendly, but doesn’t have to be in every case.

In summary, the step-up in basis is a powerful tool for managing capital gains tax for beneficiaries, and should be utilized in most estates.

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Marital Trusts: Pros and Cons

In estate planning for a married couple, it isn’t always as simple as “give it all to my spouse.”  Blended families, concerns about creditors and predators, new spouses and taxes are all reasons to make money available for your spouse when you are gone, but not simply leave it to them.  Clients often use marital trusts in these situations to protect the inheritance they leave to their spouse.  Forbes’ recent article, “Guide To Marital Trusts,” explains the pros and cons of using a marital trust.

As a quick explanation before the pros and cons, a marital trust leaves an inheritance in trust to the surviving spouse.  The trust pays all of the income it generates (e.g. dividends) and the principal it holds can be use for certain reasons.  When the surviving spouse dies, remaining property goes to whomever the first spouse named.  There are variations, but you can assume these trust terms for now.

The main benefits are the following:

  1. Tax Planning.  Depending on the tax elections you make, the marital trust can be considered the same as leaving the inheritance to your spouse for estate and gift tax purposes.  This allows you to use the marital tax deduction and not have estate tax apply to that inheritance.  Separately, you can elect the opposite, which might be wiser in substantial estates as it keeps money out of the estate of the survivor.  Either way, the trust gives flexibility you don’t get from leaving the inheritance directly to spouse.
  2. Provide for Spouse.  The marital trust distributes its income directly to the spouse.  Meaning, there is a stream of money that goes to the spouse to provide for their needs, and they may have the power to use more of the marital trust if they need it.
  3. Remainder Beneficiary Planning.  When the surviving spouse dies, the remaining assets go to the beneficiaries set by the first spouse.  This is helpful in blended families when the first spouse wants the remaining assets to go to their children as opposed to surviving spouse’s family.  You can change this to provide options to the surviving spouse of who to leave it to, even if it is limited to a group of people.  Similarly, because the trust holds the property, it tends to stay there and provide financial security to the future beneficiaries.
  4. Protect Assets from Creditors, Predators and Potential New Spouses.  Because the assets are held in trust with restrictions on it, there is an aspect of asset protection planning.  It is very difficult for creditors of the surviving spouse to get at the assets held by the trust, although the income might be in jeopardy.  Depending on who is in charge of the trust, it can also prevent a spouse who is suffering from cognitive decline misuse or waste the trust assets.  It can also prevent assets being paid to a new spouse because they are not the beneficiary.  Depending on how it is structured, you can also make it so that remarriage affects the distributions.

However, there are also downsides to using a marital trust. Those downsides include:

  1. This is the number one reason people don’t use a marital trust.  It is an irrevocable trust, so once the first spouse dies, it is difficult to undo or change.  That is also a pro to the first spouse (if you want to make sure left over money goes to your kids, you can’t let the survivor change that), but can make things cumbersome.
  2. Requires attention. To get the benefit of the marital trust, you need to make sure the assets are properly titled to the trust and that the income is distributed as appropriate.  Many financial institutions set up the accounts held by the marital trust to automatically distribute the income, so this is very doable, but does require more administration and attention.

I would add, as sort of a pro and a con, trusts for spouse can greatly assist with Medicaid planning for the surviving spouse if done as part of the first spouse’s will.  The marital trust can protect assets so that they are disregarded for Medicaid eligibility, although the income must be used.  If you want to build a trust for the surviving spouse for any of the above pros while incorporating Medicaid planning, there may different styles of trusts that can accomplish it better.

Reference: Forbes (June 30, 2022) “Guide To Marital Trusts”

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