Basics of Federal Estate, Gift, and Generation-Skipping Transfer (“GST”) Tax - 2024 Update

The bad news is that there is a federal transfer tax on assets that you give away during life, at death, and to individuals two or more generations below you. The good news is that this transfer tax will only apply to the wealthiest Americans and, even so, there are strategies you can use to minimize or avoid its application. The federal estate, gift and GST tax only kicks in above a certain dollar threshold. Furthermore, there are additional wealth transfer strategies that do not trigger any transfer tax at all if structured properly.

Taxable Gifts

There is a federal estate and gift tax that kicks in only when you make taxable gifts above a certain amount. In 2024, each person can give away $13.61M during life or at death before incurring a federal gift or estate tax ($27.22M for married couples). This is your federal “exemption” from estate and gift tax, and it increases every year with inflation. Taxable gifts made above this amount generally incur a 40% tax. Furthermore, gifts to grandchildren or more remote descendants can be subject to a separate “generation-skipping transfer” (or “GST”) tax if they exceed the GST tax exemption amount, which in 2024 is also $13.61M per person ($27.22M for married couples). The federal estate and gift taxes are unified, which means that gifts utilizing exemption during life will deplete the amount of exemption available at death. See this Cheat Sheet for a quick breakdown of the federal Estate, Gift and GST taxes.

Example

Mary gives $1M to each of her three grandchildren during life. As a result of these lifetime gifts, Mary uses $3M of her federal gift and estate tax exemption, as well as $3M of her GST exemption (because the recipients are grandchildren). Mary has $10.61M left that she can give away free from federal estate or gift tax. If Mary dies, and her remaining estate is over $10.61M, the amount above $10.61M would generally be subject to federal estate tax and possibly GST tax (i.e., if it passes to grandchildren or more remote descendants). In addition, Mary may live in a state that imposes its own state estate or gift tax. For example, New York currently imposes its own separate state estate tax with a lower threshold estate exemption amount as compared to the federal exemption. For a snapshot of the estate taxes applicable to residents of certain states, see this Cheat Sheet.

Tax-Free Gifts

In addition to these lifetime exemptions, there are some “freebie” gifts that you can make that will not count against your lifetime exemption and will also not incur estate, gift, or GST tax:

• “Med/Ed” Gifts. Gifts for medical or educational purposes are unlimited in amount but limited in purpose. Payment must be made directly to the medical or educational provider in order to qualify, but there is no maximum on how much you can give.
• Annual Exclusion Gifts. Gifts that qualify for the annual exclusion from gift tax are limited in amount, but unlimited in purpose. In 2024, you can give $18,000 each year to any person for any reason ($36,000 if you “split” the gift with your spouse). These gifts can be made outright, to a qualifying trust, or even to a 529 College Savings Plan.

Example

Mary contributes $18,000 to each of her grandchildren’s 529 plans, or hands each of them a check for $18,000 every year. Mary also pays their college tuition directly to each of their colleges. Besides being a generous grandmother, Mary is also being smart in how she makes gifts to her grandchildren. Each of these gifts is not only tax-free, but none of the gifts count against her lifetime exemptions from federal estate, gift, or GST tax.

Find answers to common estate planning tax reform questions here.