ESTATE, GIFT, AND GENERATION SKIPPING TAX EXEMPTIONS

ESTATE, GIFT, AND GENERATION SKIPPING TAX EXEMPTIONS

The Estate Tax is a federal tax levied on the transfer of wealth when an estate exceeds a predetermined amount in effect the year an individual passes away; is often referred to as the lifetime applicable exclusion amount or the “AEA”. The Gift Tax is a federal tax imposed when a gift is made during a donor’s lifetime that exceeds a predetermined amount; sometimes referred to as the “annual exclusion.” The Generation Skipping Tax is a federal tax applied to gifts or inheritances that skip a generation. The purpose of the generation skipping tax is to prevent individuals from avoiding estate taxes by skipping children in favor of grandchildren. A generation skipping transfer tax may also be applied when a donee receiving a gift is 37.5 years younger than a donor making a gift. The Generation Skipping Tax also is subject to a separate applicable exclusion amount.

Generally, transfers exceeding these limitations are subject to a taxation rate of approximately 40%.

ANNUAL ADJUSTMENTS

The applicable exclusion amount and annual exclusion are used to shelter transfers from estate, gift, and generation skipping taxes and can increase annually. The Internal Revenue Service (“IRS”) uses the Chained Consumer Price Index for Urban Consumers (“C-CPI-U”) to determine the inflation adjustments applied.

For deaths occurring in 2024, the federal estate tax lifetime (and generation skipping) applicable exclusion amount will increase to $13,610,000, per individual. For married couples, this means the combined lifetime applicable exclusion amount will be $27,270,000, if a catastrophe occurred and both individuals died in the same year.

Tax sheltered gifts made in 2024 to individuals during a donor’s lifetime will increase to $18,000, per donor, per donee.

ANTICIPATED ADJUSTMENTS FOR 2026

As discussed in a previous article, when the 2017 Tax Cuts and Jobs Act expires at the end of 2025, and if Congress takes no further action, deaths occurring in 2026 will likely be subject to an exclusion amount of around half of what it is today – somewhere close to $7.0 million per person. These sunset provisions will mean significant consequences for many estates and have the potential to result in more estates being subject to a 40% federal estate tax.

IN SUMMARY

Individuals, business owners, and real estate investors will need to review their estate planning far in advance of 2026 to avoid a potential negative impact and minimize tax liabilities. Often this set of problems is approached with a combination of complex techniques to reduce or, in some cases, completely eliminate, a potential tax due.

Having an estate plan in place that contemplates net worth, character of assets, and anticipated growth is key to planning for tax efficiency. Kirk & Simas is available to help Central Coast families, businesses, and real estate owners protect generational wealth and family legacy assets.