Take advantage of opportunities to make tax-free gifts in 2024

In 2018, the exemption roughly doubled what it was in 2017, and the exemption is annually adjusted for inflation. The exemption for 2024 is $13.61 million, which is an inflation increase of $690,000 compared to the 2023 tax year. The 2024 inflation increase is especially relevant if you are close to or have already used up most of your lifetime exemption as you will now be able to take advantage of this increase by making additional tax-free gifts.

If you have not yet taken advantage of the exemption, now is a great time to consider making lifetime gifts. As mentioned before, the temporarily increased exemption will be sunset on Dec. 31, 2025 down to about $7 million, indexed for inflation. The increased exemption is a ‘use it or lose it’ opportunity. The IRS has issued regulations stating that there will be no claw back for gifts made between 2018 and 2025, meaning if you take advantage of the increased exemption and make $13.61 million of gifts in 2024, your estate will not owe estate tax on those gifts after the exemption cuts in half after the sunset.

The sunset has an interesting impact on wealth transfer planning. We “ran the numbers” on two scenarios to illustrate the impact of making gifts before the sunset.

The first scenario applies the laws under the TCJA and assumes the taxpayer made gifts of $13.61 million in 2024 before the sunset. The second scenario assumes the taxpayer did not make lifetime gifts and held all assets at death. We see an impactful difference. Assuming the same amount of wealth and about 2% appreciation, there is a $3.9 million estate tax savings. Also, the $2.9 million appreciation on the assets gifted away during life is further value that is moving on to descendants or others estate and gift tax-free. As you can see, taking advantage of using up the lifetime exemption before 2026 has a significant impact on an individual’s estate tax liability.

The planning implications of this fairly rudimentary comparison are significant. Because the increased exemption is only temporary, if you are concerned about reducing your federal estate tax, you should take advantage of using up your lifetime exemption sooner rather than later. If you already used up all your lifetime exemption in 2023, consider taking advantage of the $860,000 inflation increase in 2024 by making further gifts. Consult with your RSM tax professional and estate planning attorney to prioritize your gift and transfer goals well before the temporarily increased exemption sunsets on Dec. 31, 2025.