Overview of Federal Estate and Gift Tax landscape and looking forward to 2025 and 2026
Current Law on Annual Gift Tax Exclusion and the Estate, Gift and GST Tax Exemptions
Each year, the US Internal Revenue Service (IRS) sets the amount of the annual gift tax exclusion, which allows a taxpayer to give a certain amount (in 2024, $18,000) per recipient tax-free without using any of the taxpayer’s lifetime gift and estate tax exemption. For example, a married couple can give $36,000 per recipient in 2024 without triggering gift tax, using any of their gift and estate tax exemption, or requiring the filing of a gift tax return. If that married couple had three children and five grandchildren, they could transfer $288,000 in 2024 to their descendants without touching their combined $27.22 million gift and estate tax exemption. Not only are the assets removed from the taxpayers’ taxable estates, any future appreciation of the assets also avoids gift and estate taxes.
In 2024, each spouse has a gift and estate tax exemption of $13,610,000. Under the current unified gift and estate tax system, the gift and estate tax exemption are linked, meaning the exemption amount available to a taxpayer's estate at death is reduced by the amount of the exemption used for lifetime gifts (excluding gifts that qualify for the annual gift tax exclusion). If an individual made $13,610,000 of lifetime gift transfers in 2024, no gift tax would be imposed.
If an individual makes gifts in excess of the annual gift tax exclusion, a gift tax return will be due on April 15 the following year, even if no gift tax is due, to report the gift and track the amount of the lifetime exemption that has been used.
Generally, transfers to spouses are not subject to gift or estate tax. This is achieved through the “marital deduction.” In addition, the estate tax exemption is portable among a married couple, meaning any estate exemption not used by one spouse can be transferred to the surviving spouse. For example, let’s assume a married couple where a husband is the first to die and his wife is the surviving spouse. If the husband’s estate does not use his full exemption and an election is filed with his estate tax return, the surviving wife can include his unused exemption in calculating her gift and estate tax exemption when it comes to determining her estate tax liability. One limitation is that a surviving spouse is only allowed to use the unused estate tax exemption of his or her last deceased spouse. Notably, the GST tax exemption (in 2024, $13,610,000) is not portable between spouses.
The federal, estate and GST tax rate remains at 40%.
2025 Exclusion and Exemption Amounts
On October 22, 2024, the IRS announced that the annual gift tax exclusion for 2025 is increasing due to inflation. The exclusion will be $19,000 per recipient for 2025—the highest exclusion amount ever.
The IRS also confirmed that for 2025, the federal estate, gift and GST tax exemptions will be $13,990,000 per taxpayer, an increase of $380,000 from 2024. This means, a married couple can shield a total of $27.98 million from federal estate, gift and GST tax in 2025. For a couple that has already maxed out lifetime gifts, they may now give away another $760,000 starting in 2025.
2026 Sunset of Federal Tax Exemptions but Congress likely to act. Absent any new legislation, these higher exemptions are scheduled to sunset on January 1, 2026, and revert to where they were in 2017, as indexed for inflation. This means that the exemption will revert to approximately $7.25 million for individuals and $14.5 million for married couples in 2026. If Congress does not act, the IRS and Treasury have issued final regulations clarifying that the government will not claw back (i.e., bring back into the estate tax net) amounts gifted between 2018 and 2025 up to the higher exemption amounts in those years, even after the exemptions drop down again in 2026 and beyond.
However, Congress most certainly will be considering major tax legislation in 2025 due to the expiration of most of the individual tax provisions from the 2017 Tax Cuts and Jobs Act (TCJA), which notably was passed by a Republican-led Congress during the previous Trump administration. President-elect Trump campaigned on a permanent extension of the TCJA, so addressing this law will certainly be a top priority for the new administration. With Republicans gaining control of the White House and both chambers of Congress, they will have the ability to address the TCJA and other tax provisions through the “budget reconciliation process” with mere majorities in the House and the Senate, instead of requiring a “super-majority” of 60 votes to pass legislation in the Senate.
North Carolina currently has no state inheritance, estate or gift tax
North Carolina repealed the state-level estate tax in July 2013. Thus, for deaths occurring on January 1, 2013, or later, only the Federal estate tax rules apply for North Carolina decedents. In addition, North Carolina repealed its gift tax for gifts made on or after January 1, 2009.
Federal Gift, Estate and GST Tax Exemption Amounts
2024 - $13,610,000
2025 - $13,990,000
2026 - $7,250,000 unless law changes
Federal Annual Gift Tax Exclusion Amounts
2024 - $18,000 / recipient
2025 - $19,000 / recipient
Summary
Please reach out if we can assist. Helen is available to assist with drafting documents necessary to carry out your gifting strategy, creating individually tailored estate planning documents based on your financial and family circumstances, or reviewing your current estate planning documents to determine whether updates are recommended. In addition, Helen is well suited to work with your accountant, financial advisor or family office to structure or update a tax-efficient estate plan.