Dear Mr. Premack: We’ve entered a new year, and I’m wondering if you could recap any changes to the estate tax and gift tax exemptions for 2024. Thanks. – R.B.
Federal Estate Tax Exemption
The federal estate tax exemption in 2023 was $12.92 million per individual, which is increasing to $13.61 million per individual for those who die in 2024. If an individual’s estate is valued at less than the exemption amount, the estate will not be subject to federal estate taxes. There is not even a requirement that an estate tax return be filed with the IRS when the value is below the exemption amount.
Each individual in a marriage is allowed the exemption, so a couple can in 2024 pass $27.22 million to their heirs tax free. Some strategy is important for married couples to take full advantage of this doubling effect; they must either utilize a Credit Shelter Trust or file a request with the IRS for portability of the exemption of the first spouse to die.
Beware that the exemption is set to decrease significantly in 2026, unless Congress changes the law. When the exemption was increased under President Trump he signed an automatic roll-back to prior levels in 2026. The expectation is that the exemption amount may be reduced to around $6.8 million per individual in 2026. Congress has never before allowed a roll-back to take place, but considering the current dysfunction in Congress it is hard to predict what will occur.
Federal Gift Tax Exemption
The annual federal gift tax exclusion for 2024 is $18,000, an increase of $1,000 from 2023. This means that an individual can give up to $18,000 to as many people as they want without having to pay any taxes on the gifts or report to the IRS. For example, a person could give $18,000 to each of their children, grandchildren, and neighbors this year without any gift tax implications. A married couple could give $36,000 to each of their children, grandchildren, and neighbors without gift taxes.
Neither Texas nor Washington has a gift tax to be concerned about. Further, Texas has no state-level estate tax or inheritance tax. Washington, on the other hand, has a significant estate tax.
Washington State Estate Tax
The exclusion amount for Washington’s estate tax remains the same in 2024 as it has been since 2018: $2,193,000. If an individual’s estate is valued at less than that amount, it will not be subject to Washington State’s estate tax. If the value is over the exemption amount, the next $1 million is taxed at 10% which gradually reaches 20% for amounts that exceed the exemption by $9 million.
In a strategy similar to that used to reduce federal estate taxes, Washington married couples can utilize a Credit Shelter Trust to double their estate tax exemption. The concept is to create a trust in your Will (or a sub-trust in your Living Trust) to which each spouse leaves any assets exceeding the exemption amount. At the first death, the Credit Shelter Trust segregates funds from the surviving spouse’s estate, leaving them available for the survivor’s benefit while being free from future estate tax. When the second spouse dies, the trust fund goes to the heirs free of estate tax, and the only tax due is on assets held by the second spouse in excess of the exemption amount.
Credit Shelter Trusts to avoid federal estate tax were very common until around 2013, when Congress and President Obama made “portability” of the exemption a permanent part of federal law. Portability allows the surviving spouse to use the exemption of both spouses without first creating a Credit Shelter Trust, instead requesting the larger exemption by filing a return with the IRS. By contrast, Washington state does not allow portability of the exemption so a Credit Shelter Trust may be very important for married Washington residents.
Another strategy for avoiding Washington estate tax is to gift assets prior to death. Washington does not impose a gift tax and does not claw back gifts given before death. In contrast, the federal estate tax system both reduces the exemption amount for taxable gifts given, and claws back into the estate’s value any life insurance policies gifted away within 3 years of the date of death. Further, an asset that is gifted away does not qualify for the free step up in basis for federal capital gain tax purposes. For example, it is generally not a good idea to give title to your house to your children before you die because they will pay more tax when they sell the house than they would have paid by inheriting the house.
The Washington legislature comes into session on January 8, 2024. HB 1484 was introduced in 2023 to allow the exemption amount to be increased to $2,639,000 and then adjusted for inflation after 2024. Current law already allows an adjustment based on a defunct consumer price index; HB 1484 would, if it passes, peg the adjustment to a valid and current consumer price index.
It is crucial to stay informed about these changes and plan accordingly. If you need assistance with your estate planning, make an appointment at www.Premack.com. Remember, proper planning today can save your loved ones from unnecessary stress and financial expenses in the future.
Paul Premack is a Certified Elder Law Attorney for Estate Planning, Trusts, and Probate. Paul is licensed to practice law in Texas and Washington. Visit our website at www.Premack.com to read the archive of articles or to make an appointment or call us at 210-826-1122 (Texas) or 206-905-1122 (Washington).
Article published on 1-5-2024.