Estate and Gift Tax Update

February, 2024

The 2018 Tax Cuts and Jobs Act is in effect through the end of 2025 and there are annual increases to estate, gift and generation-skipping tax exemptions which are important to note. 

Estate, Gift and Generation-Skipping Tax

• The federal estate tax exemption in 2024 is $13,610,000 per individual. If a client is married, any unused exemption at the first death ports, or passes, to the surviving spouse, so that the exclusion doubles to $27,220,000 without the need for sophisticated estate planning for federal estate tax purposes. The tax rate remains at 40% on the amount exceeding the exemption.

• The annual gift tax exemption has increased to $18,000 (from $17,000) per donee (or $36,000 if the donor is married). Gifts for tuition and/or medical expenses paid directly to the institution or medical provider remain unlimited.

• The federal gift tax exemption for 2024 is the same as the estate tax exemption, so that an individual can now gift $13,610,000 (or $27,280,000 if married) without incurring a gift tax. If an individual makes a gift exceeding this amount, a gift tax return will have to be filed and the gift will reduce the $13,610,000 estate tax exemption.

• Furthermore, the generation-skipping exemption is also $13,610,000, which means that a large amount of wealth (up to $13,610,000 per taxpayer or $27,220,000 if married) can pass down two generations (such as to grandchildren).

What does this mean for you? 

We have been writing in our newsletters since 2018 that the way to “lock in” the current federal estate and gift exemptions is to make gifts now so that they are “grandfathered” when the exemptions revert on January 1, 2026 (absent Congressional action) to their 2017 levels of $5,490,000 (indexed for inflation). In other words, if you gifted $5,000,000 of assets over the past years, now an individual has an additional $8,640,000 of exemption to use before January 1, 2026.  

Keep in mind one quirk of the federal estate tax law. All gifts over the annual exclusion amount ($18,000 for a single person and $36,000 for a married couple) are added back to your estate at your death. In other words, if you have an estate of $10,000,000 and you gift $5,000,000, the IRS will add back the $5,000,000 gift at death and estate tax you on $10,000,000 (less the current exemption). So why gift? Because you are removing all of the growth on the $5,000,000 from your estate. If you didn’t make the gift, you would be estate taxed on all of the appreciation as well.

What are some of the techniques our clients are implementing before legislative changes are enacted? 

• Gifts to Spousal Lifetime Access Trusts (or SLATs). We discussed this in our Spring, 2019 newsletter and can be found here. This has been the most attractive technique due to its flexibility. It removes future appreciation from the estate while still giving the spouse access to money. In basic terms, Spouse 1 makes a gift to a trust in which Spouse 2 is the trust beneficiary. Spouse 2 has the right to receive the trust’s income (being dividends, interest, rent or K-1 profits from a business) and can have certain rights to principal. Spouse 2 will then create a reciprocal trust benefitting Spouse 1. This way, in essence, both spouses are still benefitting from the trust monies while both are alive. One problem is that these two trusts cannot be identical or implemented at the same time due to a principle called the “reciprocal trust rule”. However, if the trusts are drafted so that they are sufficiently different and are separated significantly in time, we can avoid this rule. We recommend separating the SLATs by one year, so with the federal exemptions schedule to expire in 2026, now is the time to implement this technique.

• Grantor Retained Annuity Trusts (also called GRATs). These trusts are used in order to remove future appreciation in a short period of time, such as 2-3 years. The concept with a GRAT is to transfer assets to a trust which pays you an annuity equal to what you put into the trust plus a government interest rate (which now is approximately 5%). For example, if you put $1,000,000 in a 2 year GRAT, it will pay you $535,000 after year 1 and $535,000 after year 2. Then, you ask, why do this if the GRAT repays what you put in with some interest? The benefit is that any appreciation during the 2 year term in excess of the interest paid will be distributed to your heirs without having used any of your lifetime $13,610,000 estate and gift tax exemption. 

New York and Connecticut Estate Planning

New York and Connecticut assess separate estate taxes which are not portable and stand separate from the federal estate tax. The best way to describe the state estate tax exclusions is that they are “use it or lose it”. Without properly drafted Wills and trusts, a married couple will only have the use of one exemption, not two, and in the case of New York, could cause an estate tax on the entire estate from the first dollar. 

Florida, New Jersey and 31 other states have no estate tax. 

The estate tax exemption in 2024 for New York is $6,940,000 and for Connecticut is $13,610,000.  From a New York perspective, only gifts made within 3 years of death are brought back into the estate for calculating estate tax. Connecticut is the only state in the country with a gift tax and the exemption in 2023 is $13,610,000.   

The rates in these states are very similar and range from approximately 5% to approximately 16%. Keep in mind that for federal and state estate tax purposes, you can leave an unlimited amount to your spouse (assuming your spouse is a United States citizen). 

New York is extra nefarious because of the “cliff tax’ meaning that when the estate exceeds 105% of the $6,940,000 exemption, the exclusion disappears and the estate tax is due from dollar one. For example, a $7,000,000 estate will trigger a $158,391 New York estate tax 



So, what is there to do about minimizing or eliminating state estate taxes?

Continue planning with “credit shelter trusts”

The backbone of most estate plans involves creating a trust for the surviving spouse of an amount equal to the estate tax exclusion. The surviving spouse can live on this trust by receiving the income and have access to principal and when he or she dies, the trust will pass estate tax free to the children or other heirs.

Let us assume you have a $10,000,000 New York estate. The following explanation will illustrate how the “credit shelter trust” will eliminate New York estate tax. If Husband has $5,000,000 of brokerage accounts and dies in 2024 and leaves all his assets to Wife, who also has $5,000,000 of brokerage accounts, her taxable estate on her death will be $10,000,000 and the New York estate tax will be $1,067,600. The children will only receive approximately 89% of the estates. There will not be any federal estate tax because Husband leaves his $13,610,000 exclusion to Wife so that, when combined with her $13,610,000 exclusion, both exclusions more than cover them for federal estate tax purposes.

Instead of Husband leaving his $5,000,000 outright to Wife, if he holds the $5,000,000 in a “credit shelter trust” for Wife, upon her death, her taxable estate is $5,000,000, not $10,000,000. The reason is that the “credit shelter trust” avoids estate tax at Wife’s death since she doesn’t have unilateral rights over the trust and the $5,000,000 bypasses her estate and passes to children free from estate tax. Since Husband and Wife are only each estate taxed on their respective $5,000,000 and since that is below the $6,940,000 New York threshold, the children will receive 100% of the estates at the second death.

Please feel free to reach out to the estate planning partners at Danziger & Markhoff LLP, Michael Markhoff, Harris Markhoff or Christopher Miehl, with any of your questions. You can reach us at mmarkhoff@dmlawyers.com, hmarkhoff@dmlawyers.com and cmiehl@dmlawyers.com