The Internal Revenue Service (IRS) recently announced that the estate and gift tax exemption is increasing in 2024 to $13.61 million per person, up from $12.92 million in 2023. (Read IRS Rev. Proc. 2023-34.)

The IRS also confirmed that the annual gift exclusion amount is increasing from $17,000 per person in 2023 to $18,000 per person in 2024.

Okay great, you might be saying to yourself. But what does that mean, and why does it matter?

Great questions.

There are a lot of misconceptions about estate taxes and gift taxes — often referred to as “death taxes.” What they are, who has to pay them, how to avoid them.

This article is my attempt to demystify the topic for you and to help you figure out how these tax changes could affect your estate plan.

A Brief Introduction to “Death Taxes”

The term “death tax” is a bit misleading in several ways.

First and foremost, it is not a tax that everyone has to pay upon their death.

In fact, very few people (or their estates) will have to pay any taxes upon their death.

Second, the term does not refer to a single tax but rather to a few different taxes that can be imposed as a result of, or relating to, someone’s death.

Taxes that fall under this umbrella include:

Estate Tax
Gift Tax
Generation-Skipping Transfer (GST) Tax
Inheritance Tax

The estate tax, gift tax, and GST tax are taxes assessed on the value of an estate before it is distributed to the beneficiaries entitled to it.

The inheritance tax is a tax assessed on the value of an inheritance received by a beneficiary.

Related post: Do I Need to Pay Inheritance Taxes?

Third and finally, while the idea of “death taxes” is often associated with the federal government, states can (and do) impose their own estate and inheritance taxes as well.

The federal government has an estate tax, gift tax, and GST tax, but it does not have an inheritance tax.

Currently, 12 states and the District of Columbia have separate state estate taxes. Six states have an inheritance tax (although Iowa’s will phase out in 2025). Maryland is the only state with both an estate tax and an inheritance tax.

Oklahoma used to have an estate tax, but it was eliminated in 2010. We do not have an inheritance tax.

Because Oklahoma no longer has a separate estate tax, this article will focus only on the federal estate tax imposed under Internal Revenue Code Section 2001 (I.R.C. § 2001).

Part I. Estate Taxes

As noted above, the estate tax is a tax imposed on estates over a certain value.

That “certain value” is formally termed the “unified credit,” but it is more commonly known as the estate tax exemption amount. The reason the exemption is called a unified credit is that it is tied to the exemption for gift taxes. But more on this later.

Let’s look at the newly announced $13.61 million exemption for 2024.

This means that if a person dies in 2024, they can leave an estate worth $13.61 million and incur no federal estate taxes. Using a tax concept called estate tax portability, a married couple can actually shield up to double that amount, or $27.22 million.

Estate tax rates for 2024. The marginal rates in the left column only apply to the value of an estate over the exemption amount, which is increasing to $13.61 million in 2024.

The estate tax exemption has not always been so high.

Just 25 years ago, the exemption amount was $600,000, with the top tax rate for estates in excess of that amount of 55%.

Starting in 2010, the estate tax exemption amount was pegged at $5 million and indexed to inflation, meaning the exemption would rise about 2% per year from that $5 million base.

However, the Tax Cuts and Jobs Act (the “Trump Tax Cuts”), signed December 2017, effectively doubled that base amount. Here’s how the numbers shake out:

In 2017, before passage of the Trump Tax Cuts, the estate tax exemption amount was $5.49 million per person (or $10.98 million per couple).
In 2018, after passage of the Trump Tax Cuts, the exemption amount became $11.18 million per person (or $22.36 million per couple).

That’s enough to buy 7 Aston Martin Valkyries. You can even throw in a few Ferraris for good measure.

Or you can buy 4.3 million Big Macs. Take your pick.

Related post: Estate Tax Portability in a Nutshell

Considering 0.2% of estates had to pay any estate tax in 2017, this substantial increase in the exemption means only the mega-wealthy need to worry about estate tax planning at the moment.

In fact, according to IRS data the average estate subject to estate taxes in 2021 (the most recent year such data is available) was worth nearly $40 million. And those estates only paid taxes of about 16.5%.

Let’s go back and compare more numbers:

In 2017, before the Trump Tax Cuts, approximately 6,500 estates paid estate taxes.
In 2021 (the most recent year after the Trump Tax Cuts for which we have data), only 2,584 estates paid estate taxes.

Like I said, most of us are going to be fine.

But if you are someone who may be affected by the estate tax, there are a number of estate tax planning options that you should consider. And you should start considering them as soon as possible.

The earlier you begin planning, the more of your assets your can protect.

Even if you are not a mega-multimillionaire, it is important to keep an eye on how the estate tax exemption changes. After all, the Trump Tax Cuts are set to expire after 2025.

This means the estate tax exemption will revert to its inflation-indexed base of $5 million.

Part II. Gift Taxes

Remember how I said that the estate tax exemption was really a combined estate and gift tax exemption? I’m going to explain that now.

Because the estate tax is based on the value of an individual’s estate at their death, one easy way for someone to avoid taxes would be to give away assets during their lifetime.

This is why the gift tax was implemented: to capture tax revenue from those looking to get around paying estate taxes.

The estate tax and gift tax were eventually merged in 1976, since they are essentially two sides of the same coin, leading to a unified tax framework.

Related post: A Brief History of the Federal Estate Tax

As long as the gift tax has been around, there has also been a gift tax exclusion.

Similar to the estate tax exemption, the gift tax exclusion (also known as the annual exclusion) is the amount under which no gift taxes are imposed.

With an annual gift tax exclusion of $18,000 in 2024, you can give up to $18,000 to as many people you want (me, for instance) each year during your lifetime without needing to file a gift tax return. Gifts under $18,000 are excluded from taxes.

But what happens if you give more than $18,000 to someone?

The aggregate amount gifted over the gift tax exclusion during a person’s lifetime reduces their estate tax exemption dollar for dollar.

This is why the estate tax exemption is referred to as a unified credit. The lifetime exemption amount is unified with the annual exclusion.

Let’s look at an example:

John’s assets are worth $13.58 million, which is below the $13.61 million estate tax exemption amount. If he dies in 2024, his estate would owe no estate taxes.

Before his death, however, John gives Mary $118,000, or $100,000 more than the annual exclusion amount for 2024. Because he gave over the exclusion amount, John must file a gift tax return documenting the gift.

He won’t actually owe taxes when he files the return.

Rather, his estate tax exemption is reduced by $100,000 — the amount he gave over the annual exclusion. So if he dies later, his remaining estate tax exemption would be $13.51 million. That means if his estate is worth $13.58 million at his death, he would owe estate taxes on $70,000 ($13.58 million - $13.51 million) of his estate.

Confused? That’s okay. It’s really not even as simple as the above explanation makes it out to be, when you consider deductions, credits, and valuation issues.

Gift taxes will not be a concern for most people, since the lifetime estate and gift tax exemption is so high.

However, you are still required by law to report gifts over the annual exclusion amount on a gift tax return, IRS Form 709.

Sometimes gifts can be used strategically to avoid estate taxes or to minimize other problems after death. Other times, gifts can cause adverse tax consequence.

For that reason, it is always a good idea to talk to an attorney before making a major gift — even if you don’t think you need to worry about estate taxes.

Part III. Generation-Skipping Transfer (GST) Tax

The generation-skipping transfer (GST) tax is possibly the least known of the death taxes. It is a federal tax on a gift or inheritance that prevents the donor from avoiding estate taxes by skipping children in favor of grandchildren.

Suppose you are a person whose estate will be subject to estate taxes.

If you pass your estate onto your children, then those assets would become part of their estates and could be subject to estate taxes as well. Double estate taxation.

However, you realize that you can create a trust that benefits your children during their lifetimes but then pays to your grandchildren upon your children’s deaths.

The trust assets would be included in your estate at your death, and the amounts ultimately distributed to the grandchildren at their deaths, but you would avoid estate taxes for the intervening generation (your children).

Have you just avoided the problem of double estate taxation?

Unfortunately, no.

The GST tax was implemented specifically to close this loophole so that the transmission of wealth is taxed at each generation.

The GST tax ensures that a grandchild (referred to as a “skip person”) ends up with the same value of assets that they would have if the inheritance was received directly from their parents instead of their grandparent.

Importantly, the GST tax is imposed only if a generation-skipping transfer avoids the imposition of estate taxes at a generational level.

If the amount transferred is not over the estate tax exemption, there is no GST tax.

With the estate tax exemption increasing to $13.61 million in 2024, even fewer people will have to worry about paying the GST tax.

Minimize Taxes Through Estate Planning

Estate planning is about more than just figuring our whether a will or a trust is better for you. It is also about protecting your assets (from taxes, for example) so there will be more left for your heirs.

Estate and gift taxes can make estate planning even more complicated than normal. But failing to understand these concepts, or to adequately account for them in your estate plan, can have direct consequences for your loved ones and beneficiaries.

For more information about creating an estate plan (or updating your plan to minimize or avoid estate taxes), contact the experienced Oklahoma City estate planning attorneys at Postic & Bates today for a free, no-obligation consultation.

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[As with all our blog posts and other publications and resources, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]