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Four things to know about Federal Estate Taxes (and how to Avoid Them)

  1. Estate taxes generally. Estate and gift taxes generally work together and require coordination. The exemption is unified because it includes both estate and gift taxes. The current unified exemption amount for 2024 is $13.6M. Amounts legally gifted during your lifetime that are greater than the exclusion amount listed below*, are not taxed during your lifetime – they are simply applied against the exemption amount. Upon your passing, federal estate taxes are calculated against your asset value that exceeds your federal tax exemption. For example, if you die with assets of $16M, with no gifts made, then your federal estate tax base would be $2.4M ($16M – $13.6M). However, if you die with assets of $16M but you had previously made $3.0M of taxable gifts during your lifetime, then your federal estate tax base would be $5.4M ($16M – ($13.6M-$3.0M)).
  2. Gifts made during life can decrease the amount taxable at death.* Even if your estate is above the amount that would be taxable at your death, gifts during your lifetime may reduce the amount of assets considered at your death. The current annual gift tax exclusion amount is $18,000 per person, per donee; accordingly, you may engage in a gifting program that may decrease your federal tax basis without any negative tax consequences whatsoever. For example, if Grandma and Grandpa have six grandchildren, and file a joint tax return, then they can “gift” $216,000 ($18,000 x 2 x 6) annually to the grandchildren, which may, over time, significantly decrease their federal tax base without any negative effect on taxes.
  3. The federal estate tax exemption is scheduled to decrease significantly. The current exemption of $13.6M is scheduled to automatically sunset effective 1/01/26, at which time – absent further action from Congress – the exemption will decrease to approximately $6M. If not amended, this action will significantly increase the number of estates subject to federal tax.
  4. There are strategies to decrease estate taxes. Estate Taxes do not affect everyone. As the above examples illustrate, not every estate is taxable. Even if your estate appears taxable, or appears that it could be, there are planning strategies we can implement today to ensure your estate is not taxable later. Such strategies, which usually involve a combination of gifting, along with irrevocable trusts, that effectively remove the assets from your estate at death for tax purposes, will become more important (and effective) when the current exemption amount sunsets at the end of next year. You should consult with a qualified attorney or tax specialist to discuss your options and prior to implementing new strategies.

For assistance with any legal needs related to your business or estate planning, contact Fournier Legal Services at jfournier@jeflegal.com or 860.670.3535.

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