As Benjamin Franklin once wrote, “nothing can be said to be certain except death and taxes.” However, despite the political and intellectual brilliance that one of our most famous founding fathers is credited with, even he may not have foreseen the rise of Federal tax liabilities against our estate after our deaths, or even incurring tax liability for simply giving a loved one a generous gift. Perhaps nothing captures the spirit of Franklin’s quote more than the closely related Federal estate and gift taxes.

The good news is that the overwhelming majority of persons living in the United States will not have to worry about Federal gift and/or estate taxes; there is a substantial exemption from such taxes that will be discussed further below in this article. The bad news is that for those whose taxable gifts and/or taxable estate are greater than the lifetime exemption amount, they can end up liable for millions of dollars in taxes. The applicable tax rate imposed against a person’s estate can also be quite punitive; any taxable amounts above $1,000,000 are taxed at a 40% rate. Further, in addition to the Federal estate and gift tax discussed in this article, numerous states impose their own estate tax and/or “inheritance tax.” Proper estate planning can often help mitigate these tax liabilities.

In this article I will be discussing: (1) the history of the Federal estate tax and gift tax; (2) the annual and lifetime exemptions from such taxes available to tax payers; and (3) how to utilize estate planning strategies to minimize your tax liability exposure.

WHAT IS THE ESTATE TAX AND GIFT TAX?

The Federal estate tax is a tax imposed on the transfer of the assets owned by the estate of an individual after their death. In other words, after a person dies, any assets transferred by way of their last will and testament and/or their revocable trust (as examples) may be subject to the Federal estate tax. Because the estate tax applies after the death of an individual, it is often referred to as the “death tax” by its opponents. While this provocative phrase became politically popular during the Speakership of Newt Gingrich, a version of an “estate tax” has been imposed off and on since the 18th century.

While the modern estate tax as we know it was first enacted in 1916, in the 18th and 19th century the Federal Government imposed short-term taxes on estates or inheritance to help fund the country’s military efforts. In 1797, to help fund the country’s ongoing military conflict with France, the U.S. Congress passed legislation requiring Federal stamps to be purchased for various aspects of the probate process at the time. The imposed tax was dependent on the size of the bequests, and was later repealed in 1802. Similar taxes were imposed decades later to help fund both the Civil War as well as the Spanish-American War. These taxes were once again repealed following the end of the conflicts.

As noted above, the modern Federal estate tax was created by the Revenue Act of 1916. Over the years it has been repealed, reintroduced, amended, and expanded upon. The highest applicable tax rate over the years has been as low as 10% in 1916, to as high as just under 80% in much of the 1940s through 1970s. The maximum 40% tax imposed today was made permanent by Congress in 2013.

The Federal gift tax provides the Federal Government a shield against wealthy families who tried to avoid future estate taxes by giving away their assets prior to death. Made permanent in 1932, the original Federal gift tax was significantly lower than the Federal estate tax rate was at the time. The imposition of the Federal gift tax not only provided the Federal Government with much needed revenue during the Great Depression, but it also allowed the wealthiest of society to provide for their heirs at a much lower tax rate than their estate would be liable for. Much like the Federal estate tax, the Federal gift tax’s applicable tax rate has changed over the years, but was made permanent at the same rates as the Federal estate tax in 2013.

WHAT EXEMPTIONS ARE AVAILABLE FOR TAX PAYERS?

There are two types of exemptions available to tax payers: (1) an annual exemption from Federal gift taxes; and (2) a lifetime exemption from Federal estate and gift taxes. In 2024, each taxpayer is allowed an annual exclusion amount of $18,000 per donee. The exclusion amount is adjusted annually to account for inflation. This allows an individual to give up to $18,000 to as many persons as the donor wants without incurring Federal gift tax liabilities. A married couple can each give away this amount, allowing for a combined gift of $36,000 to be made to each child the couple has. Next year, the same married couple can once again gift each of their children their combined 2025 exclusion amount. This provides for numerous estate planning opportunities.

The second available exemption, the lifetime exemption from Federal estate and gift taxes, is often referred to as the “unified credit.” The Tax Cuts and Jobs Act of 2017 (the “TCJA”) doubled the unified credit available to a person from $5.6 million to $11.2 million, not including an annual adjustment for inflation. In other words, if an individual died in 2018 without having made any taxable gifts during his or her lifetime, only estates in excess of $11.2 million will be subject to the Federal estate tax. And for a married couple seeking to utilize each of their respective unified credits during their mutual lifetimes, they were able to give away $22.4 million in 2018 free from federal gift taxes. Note, however, that if an individual dies having exhausted the entirety of their unified credit, their entire estate may be subject to the Federal estate tax if they have not planned accordingly.

Because the unified credit is adjusted annually to account for inflation, the exempt amount as of 2024 is $13.61 million. This amount will again increase in 2025. However, due to a number of provisions of the TCJA being scheduled to expire at the end of 2025, including the increased unified credit amount, there is uncertainty surrounding what the exemption amount will be as of 2026. If Congress does not act during the 2025 calendar year to either extend or amend this provision of the TCJA, then the unified credit will sunset to its 2011 amount of $5 million (increased only on account of inflation over the years). The good news for those individuals and families who utilize their unified credit prior to the end of 2025 is that, even if the unified credit reverts back to its 2011 amount, the prior gifts will remain free from Federal gift tax. This means that estate planners should expect to have a very busy 2025 helping those individuals seeking to take advantage of the unified credit prior to its potential reduction in 2026.

WHAT ARE SOME AVAILABLE ESTATE PLANNING STRATEGIES?

Proper estate planning can help mitigate, although not necessarily eliminate, a high net worth individual’s exposure to the Federal estate tax. This can sometimes be accomplished by simply amending your revocable trust, or it may be prudent to establish separate gift trusts for the benefit of each of your children. The “best” strategy depends on what your goals are. And while there are numerous options to mitigate one’s Federal taxable estate, let’s look at two common approaches.

Nevada law allows for broad flexibility when creating a trust. Married couples may be aware that there is an unlimited marital deduction on assets transferred to a U.S. citizen spouse, but does your trust allow for assets to be allocated to a “Credit Shelter Trust” following the death of the first spouse? A Credit Shelter Trust is intended to hold assets valued up to the remaining lifetime Federal estate tax exemption of the deceased spouse, while the rest of the assets will be allocated to a separate trust utilizing the unlimited marital deduction. One advantage with this strategy is that the assets in the Credit Shelter Trust can continue to grow free from Federal estate tax liabilities following the death of the surviving spouse. Ensuring that your trust(s) is structured to meet your goals is always an important first step.

Another strategy that many individuals find appealing is creating one or more gift trusts for the benefit of an individual’s children. These can be structured in a manner that makes the trust a “grantor” trust for Federal income tax purposes (meaning that the Settlor is responsible for any Federal income tax liabilities) but the assets used to fund the trust are deemed gifts from the Settlor to the Trust. Further, depending on what the assets are, they may be discounted by a third-party valuation company for gifting purposes, allowing an even larger portion of the Settlor’s estate to be given to future generations. The value of the gift will come out of the Settlor’s remaining unified credit, but with the exemption amount set to be dramatically reduced in 2026, this strategy may make sense for certain individuals, though it is important to remember that these gifts are irrevocably given away. Anyone looking to gift substantial assets to another individual or trust should always ensure that they are retaining sufficient assets to live on for the rest of their lives.

CONCLUSION

There are two certainties in life: death and taxes. Congress has been kind enough to combine these two certainties and apply a tax to the assets owned by some persons following their death. The good news is that Federal estate and gift taxes will not apply to the majority of Americans. But for those who have attained substantial wealth during their lives, you may want to reach out to your estate planning attorney and discuss the options available to you. Estate planners are going to be busy in 2025, so it is recommended that individuals looking to revise their estate plan (or create a plan for the first time) be proactive in contacting your attorney. We are here willing and able to discuss your goals and which strategies make the most sense for you.