Estate taxes can enter the picture when assets are being transferred after you pass away. There is a federal estate tax, and here in Connecticut where we practice, there is a state-level estate tax.
Let’s look at the parameters and explore the possibility of giving gifts to avoid estate taxes.
Federal Estate Tax Overview
The federal estate tax can take a significant bite out of your legacy because it carries a 40 percent maximum rate. That’s the bad news, but the good news is that there is a significant credit or exclusion. This is an amount that you can transfer free of taxation.
At the time of this writing in 2024, the federal estate tax exclusion stands at $13.61 million. This is a record high that came about as a result of a provision in the Tax Cuts and Jobs Act of 2017.
There is an unlimited estate tax marital deduction, so there is no taxation on transfers between spouses that are American citizens. The estate tax exclusion is portable, so a surviving spouse can use the exclusion that was earmarked for their deceased spouse.
Federal Gift Tax
You cannot give away huge sums of money while you are living to avoid estate taxes because there is a gift tax as well. The gift tax was unified with the estate tax in 1977, so the multimillion dollar exclusion is a unified exclusion. It encompasses large lifetime gifts and the estate that will be transferred after your death.
However, there is an additional annual gift tax exclusion. You can give as much as $18,000 to any number of gift recipients each year tax-free without using any of your unified exclusion.
There is also an educational exclusion. You can pay school tuition for students without being taxed, but the exemption applies to tuition only, and the payments must be made directly to the institution.
In addition, there is an exemption that allows you to pay medical bills for others in a tax-free manner, including health insurance premiums.
Connecticut State Estate Tax
As we touched upon in the opening, Connecticut is one of 12 states in the union with a state-level estate tax, and the exclusion on the state level is equal to the federal exclusion. We are the only state that has a gift tax as well, so lifetime gift giving to completely avoid the estate tax is not an option.
Tax Efficiency Strategies
Because of the $18,000 per person annual exemption, you can give some gifts to reduce your estate tax exposure. That may not seem like a lot of money for someone who has more than $13 million, but it can add up over the years.
For example, let’s say that you are married, and you have three married children. You and your spouse can combine your exclusions to give $36,000 a year to each child and each spouse. This adds up to $216,000 per year removed from your taxable estate.
Right now, we are going through a unique phase with regard to transfer taxes. The provision in the Tax Cuts and Jobs Act that increased the exclusion to the record-high level is going to expire at the beginning of 2026.
On New Year’s Day of that year, the exclusion will revert back to the 2017 level of $5.49 million indexed for inflation. As a result, you have a window of opportunity to give gifts or use the exclusion to fund certain types of tax efficiency trusts between now and the beginning of 2026.
Schedule a Consultation Today!
Whether you are concerned about taxation or not, we can help you create a plan that is ideal for you and your family. You can schedule a consultation at our Glastonbury or Westport, CT estate planning offices by calling us at 860-548-1000, and you can alternately send us a message through our contact page.
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