Sharpe Advisor Resources
General Estate Planning

The following information and references to other resources may be beneficial to you and those who assist you in your estate and financial planning.

Federal Gift and Estate Tax Considerations

The Tax Cuts and Jobs Act of 2017 continued the trend toward reducing the impact of federal estate and gift taxes on personal estate planning. The federal estate and gift tax rate is 40% for assets valued at more than the exemption amount. Thanks to federal estate tax law changes in recent years, fewer estates will be subject to estate tax. The amount that can be left to heirs free of federal estate and gift taxes has been increased to $13.61 million for single individuals and $27.22 million for married couples for 2024. This amount will be adjusted for inflation in future years. Check for latest amounts.

An unlimited number of charitable gifts may be deducted from federal estate and gift taxes. See Internal Revenue Code section 2055(a). Check applicable state laws for restrictions that may apply.

The reduction of estate and gift taxes at the federal level on amounts left to family and other loved ones may now mean that more is available to make charitable gifts during lifetime and at death by those who are charitably inclined.

The federal gift tax was reunified with the estate tax by legislation enacted in 2011. The maximum amount that can be given to noncharitable recipients during life was increased in 2011 from $1 million under prior law to the same amount exempt from estate tax (see above). The gift and estate tax exemption is also portable between spouses, meaning that a surviving spouse can elect to use any portion of the estate and gift tax exemption not used by the predeceasing spouse.

For those still subject to federal estate and gift tax, it continues to be possible to transfer unlimited amounts to a spouse during one’s lifetime and at death. With proper planning it remains unnecessary for married couples to pay estate tax at the death of the first spouse.

The $13.61 million exemption (as adjusted for inflation) is “portable” between spouses, making it possible for a surviving spouse to use any portion of the exemption not used by the first spouse to die. This can make it possible for a married couple to pass a combined total of $27.22 million (indexed for inflation) free of federal estate and gift tax, without the use of trusts and other complex planning devices.

As a result of the 2017 tax law revisions, the process of estate planning will assume new dimensions and many will want to make significant revisions in their plans. Some people will want to take into account the possibility that federal estate taxes may again be imposed on their estates at a future date or that various states may choose to change their estate tax laws.

Planning tools that help transfer assets in a tax-effective manner to loved ones and charitable interests during lifetime rather than at death may assume even greater importance than in the past. These plans can make it possible in some cases to increase the amount of property that can be transferred under gift and estate tax exemptions.

Annual gift exclusion: An individual can give up to a certain amount each year to as many other persons as they wish without having to pay tax on the gifts (IRC section 2503(b)). For many years, the annual gift exclusion amount was $10,000. Since 1999, however, it has been indexed for inflation. In 2024 the amount is $18,000. The annual gift exclusion, however, is available only with respect to gifts of present interests.

Charitable gifts and bequests: In general, any amount can be given to a qualified charity during life or at death free of federal gift and estate taxes because of the unlimited gift and estate tax charitable deductions (IRC sections 2055 and 2522).

In the case of an outright donation in excess of the annual exclusion amount, the first portion of the gift qualifies for the annual gift exclusion under IRC section 2503(b); the balance of the gift qualifies for the gift tax charitable deduction.

Example 1: Mrs. Taylor wishes to leave $25,000 by will to a charitable organization. Rather than leaving the bequest directly to the charity, she includes the $25,000 in the amount she leaves to her husband (tax free under the marital deduction). Mr. Taylor then voluntarily gives the $25,000 to the organization—saving personal income taxes. This plan can work well when both spouses share the same charitable objectives because it provides both estate and income tax savings.

Example 2: Mr. Smith wants to establish a trust under his will to provide an income to his wife for her life. He and his wife agree that the remainder interest in the trust should go to a shared charitable interest.

Mr. Smith’s will can establish, for example, either a QTIP trust with a charitable remainder (IRC section 2056(b)(7)) or a qualified charitable remainder annuity trust or unitrust, as defined in IRC section 664 (See IRC sections 2055, 2056(b)(8)).

In either case, assuming all applicable requirements are met, the assets left to the trust will be free from estate tax at both Mr. and Mrs. Smith’s deaths because of the unlimited marital and charitable deductions. See IRC sections 2523(a) and 2056(a).

Charitable remainder trusts: The charitable remainder annuity trust or unitrust, on the other hand, would provide Mrs. Smith with either (1) a fixed annuity type of payout or (2) a payout equal to a fixed percentage of the annually determined asset value of the trust. Apart from the annual payout, Mrs. Smith could not receive any amounts of trust income or principal.

Applicable law provides for a minimum payment of 5%, a maximum payout rate of 50% and a 10% minimum charitable remainder amount for charitable remainder trusts (See IRC sections 664(d)(1)(D), (d)(2)(D)). Particular care should be given to drafting provisions of testamentary charitable remainder trusts.

Generation skipping transfer (GST) tax: This area of the law is quite complicated; however, charitable gifts may minimize the amount of transfer tax owed for some estates. It is one consideration to explore if the support of future generations is one of the person’s goals and if the estate would otherwise be affected by the generation skipping transfer tax. Under terms of federal tax legislation in 2017, the amount exempt from the GST tax was also increased to $13.61 million per individual for 2024.

For details on the GST tax, see Code sections 2601–2663 and the corresponding regulations, and check for the latest changes in the law governing this provision.

Charitable lead trusts: A charitable lead trust makes an annuity or unitrust payout to a qualified charitable organization for a specified term of years (or for a life or lives) and then distributes its assets, typically to the donor’s children or grandchildren (see IRC sections 2055(e)(2)(B), 2522(c)(2)(B)).

The initial present value of the charitable payout qualifies for the gift or estate tax charitable deduction, as the case may be. The taxable transfer to the heirs, therefore, is equal to the difference between the amount given to the trust and this present value.

For a person who has a large estate—especially an unmarried individual who cannot take advantage of the marital deduction—the lead trust is often an option that offers welcome opportunities to reduce or eliminate estate and gift taxes that may still apply despite estate tax law changes in recent years.

Power of attorney: In some cases, a donor has established a plan of regularly making charitable gifts. If asked, the donor might reply that they would like the plan to continue in the event they become incapacitated.

If this is the person’s wish, assuming they create a durable general power of attorney, an express provision should be included directing the attorney-in-fact as to the specifics of making contributions out of the donor’s assets.

Secure Act 2.0: In December of 2022, measures to expand qualified charitable distributions were included in a massive omnibus budget bill. The SECURE 2.0 Act of 2022 contained numerous provisions related to retirement plans and also modified and expanded IRA QCD transfers by indexing the $100,000 per year amount for annual inflation and allowing a one-time election for qualified distributions to charitable gift annuities and charitable remainder trusts of up to $50,000. For 2024, the maximum amount for QCD transfers is $105,000, and the one-time election of qualified distributions to charitable gift annuities and charitable remainder trusts has increased to $53,000.

Conclusion

There are, of course, more technical considerations to estate and gift planning than those covered. Check for recent changes in state and federal law before finalizing estate and financial plans. Additionally, provisions of the 2017 tax law are scheduled to “sunset” at the end of 2025 unless they are extended or changed by Congress.

This information is solely educational, namely, to provide general gift, estate, financial planning and related information. It is not intended as legal, accounting or other professional advice, and you should not rely on it as such. For assistance in planning charitable gifts with tax and other implications, the services of appropriate and qualified advisors should be obtained. Consult an attorney for advice if your plans require revision of a will or other legal document. Consult a tax and/or accounting specialist for advice regarding tax- and accounting-related matters.