It is satisfying to reach your financial goals and find that you are going to be able to leave a robust legacy for your loved ones to draw from going forward. At the same time, there is one source of concern to temper the sense of accomplishment.
There is a federal estate tax that can have a significant impact because it carries a 40 percent rate. We will look at the details in this post. We will also address the question of gift-giving as a way to get around the death tax.
Estate Tax Exclusion
Most people do not have to be concerned about the estate tax because there is an exclusion. This is an amount that can be transferred before the remainder would be subject to the tax.
In 2024, the exclusion is $13.61 million. This is a record high, and it is in place because of a provision in the Tax Cuts and Jobs Act of 2017.
Rules for Married Couples
There is an estate tax marital deduction that can be used to transfer any amount of property to your spouse free of taxation, with one caveat. In order to use this deduction, your spouse must be a citizen of the United States.
Since 2011, the estate tax exclusion has been portable. This means that a surviving spouse can use their own exclusion and the remainder of their deceased spouse’s exclusion.
Federal Gift Tax
The estate tax was originally enacted in 1916. For 12 years after that, people would give gifts to avoid the tax. Lawmakers who favored the tax didn’t like this arrangement. As a result, they installed a gift tax several years later. After a relatively brief repeal, it was reenacted for good in 1932.
These two taxes are unified under the tax code. As a result, the $13.61 million exclusion that we have this year is a unified exclusion. It applies to large lifetime gifts that you give along with the estate that will be transferred after your passing.
Additional Gift Tax Exclusions
In addition to the unified exclusion, there is a separate annual gift tax exemption that you can use to give up to $18,000 to any number of gift recipients each calendar year.
To be clear, you would be using a portion of your unified lifetime exclusion to give gifts within a given calendar year to any one person that exceed $18,000.
This may not sound like a lot of money to someone that is exposed to the estate tax, but the annual exclusion can be used effectively over time.
For example, let’s say that you are married, and you have three married children. You and your spouse could combine your exclusions to give up to $36,000 to any number of individuals each year. This is referred to as “gift splitting” in estate planning parlance.
You could give $36,000 to each husband and each wife, so that would be $72,000 a couple multiplied by three. Annual tax-free transfers of $216,000 will add up if you give these gifts consistently over an extended period.
In addition to direct gift giving, this exclusion can be used to fund certain types of trusts, and it can also be used to distribute interests in family limited partnerships.
There are two additional gift tax exclusions that fly under the radar. You can pay school tuition for others tax-free, and you are not taxed if you pay medical bills for other people. The medical exclusion extends to the payment of health insurance premiums for others.
Schedule a Consultation Today!
Even if you are not exposed to the estate tax, you should work with an Oklahoma City estate planning lawyer to develop a custom-crafted plan that is right for you and your family.
If you are ready to get started, you can send us a message to request a consultation appointment, and we can be reached by phone at 405-843-6100. We also have an office in Tulsa, and the number for that location is 918-615-2700.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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