The Lifetime Exemption

A significant part of estate planning is deciding how to transfer assets outside of your estate during your lifetime and after death. Federal gift and estate taxes in the United States are currently structured such that each citizen is given an amount that they can transfer free of tax, an amount known as the “lifetime exemption”.

For 2024, the lifetime exemption is $13.61M per person (or $27.22M per married couple), meaning people only pay gift or estate taxes when they transfer more than $13.61M during their life and/or after their death (around the 98th percentile of wealth in the country).

For gifts and estates above the exemption amount, a tax rate of 40% applies. Therefore, an estate of $20M that has not yet used any of its lifetime exemption would have a taxable estate of $6.39M and owe estate tax of $2.556M.

Married couples are able to share their lifetime exemption. Through a concept called “portability,” a surviving spouse can use the remainder of a deceased spouse’s estate tax exemption, effectively making the lifetime exemption for couples $27.22M million under current rules.

Lifetime exemption amounts are currently at an all-time high. Estate tax exemptions and rules have undergone multiple changes over the last few decades:

• In the year 2000, the exemption amount was $675,000.
• In 2002, the exemption was increased to $1M.
• In 2009, the exemption increased to $3.5M.
• In 2010, it increased to $5M.
• In 2017, the Tax Cuts and Jobs Act (TCJA) doubled the existing exemption (to $10M) and added an inflation-indexed increase each year, resulting in 2021’s total of $11.7M.
• In 2023, the exemption was increased to $12.92M.
• In 2024, the exemption was increased to $13.61M.

As currently codified, the law’s larger exemption only applies to tax years through 2025. Unless Congress makes these changes permanent or extends the current Tax Cuts & Jobs Act (TCJA) legislation, the exemption will revert back to the previous, ~$7.5M exemption ($5M, adjusted for inflation from 2010) starting in tax year 2026. However, the IRS has clarified that if a taxpayer gifts under a larger exemption amount that is later reduced, there will be no “clawback” of the exemption or taxes, making lifetime gifting a more attractive option.

Looking forward, there is a significant possibility that Congress could change the laws related to the gift and estate tax exemption. To maximize your tax exemption, review your gift and estate strategy each year to ensure that your plans are still optimized to your financial situation and the current tax law.