Death and Taxes

Do I Need to Worry about Estate Tax?

David P. Weller | 06.10.24

One of the most frequently asked questions that we receive from clients is whether they need to worry about estate tax. The answer to this is dependent on the value of their estate. Estate tax, otherwise known as ​“death tax,” only comes into play when someone has an estate worth more than the federal estate tax exemption amount ($13,610,000 in 2024) less prior gifts. Anything above that is taxed at a flat rate of 40% (ie. If Joanna’s estate is worth $20 million upon her passing and she has made no prior taxable gifts, her estate is $6,390,000 over the federal estate tax exemption amount. That $6,390,000 will be taxed at 40%, or $2,556,000). A married couple has two exemption amounts or $27,220,000 total in 2024. Most people won’t have to worry about their estate exceeding the estate tax exemption amount, but the cost can be high for those who do. 

Currently, there is no Wisconsin estate tax or Wisconsin inheritance tax.

Gifting Assets

One way to reduce your estate’s value is to give assets away during your lifetime. Every year, the federal government allows people to give away a certain amount of assets or property free of estate or gift tax. In 2024, you can give up to $18,000 to any number of people without subtracting from the estate tax exemption amount, known as the annual exclusion. For married couples, that amount doubles to $36,000.

For example, in 2024, Betty can give $18,000 to each of her three grandchildren without using her estate tax exemption amount.

What if I give away more than the annual exclusion?

If you give more than $18,000 to any one person in 2024, you’ll need to report it to the IRS by filing a gift tax return. The amount that exceeds the annual exclusion will be subtracted from your estate tax exemption amount (ie. if John is unmarried and gives his grandchild $30,000 this year, that extra $12,000 will be deducted from his estate tax exemption amount). Note: a gift is not taxable income to the recipient however, they may need to pay capital gains taxes when they sell the gifted assets in the future.

Use-It-or-Lose-It Exemption

Under current law, in 2025, the estate tax exemption amount will be increased for inflation. Then, in 2026, the estate tax exemption amount will be cut in half. So, for example, if the inflation-adjusted 2026 estate tax exemption amount were to be $14 million, it would be reduced to $7 million on January 1, 2026, unless Congress extends the higher exemption. 

The IRS has indicated that gifting that uses the exemption that will be lost on January 1, 2026, will not be pulled back into the taxable estate at the time of that person’s death. This creates a use-it-or-lose-it opportunity. 

To illustrate this, let’s say a person makes gifts totaling $7 million before January 1, 2026, and the exemption is reduced from $14 million to $7 million on January 1, 2026 (as in our example above). In this case, the person will have used the remaining $7 million exemption, but will not have gifted any of the lost $7 million exemption. The ungifted $7,000,000 would be taxable, which, at a rate of 40%, would result in a tax liability of $2,800,000.

To make full use of the use-it-or-lose-it opportunity in this example, the person would need to gift the full exemption amount of $14 million. The chart below further illustrates the impact of gifting amounts approaching the full exemption before January 1, 2026.

Of course, it is important that a person retains sufficient assets to provide comfortable support for the remainder of their life. So, while it is true that there is a use-it-or-lose-it opportunity with the estate tax exemption, a person must have significantly more than $14,000,000 to be able to comfortably fully use the exemption before it is lost. Also, married couples may lose $14 million of exemption total, but will continue to have $14 million in total exemption between both spouses after January 1, 2026. The analysis regarding gifting to use the to-be-lost exemption is complex for a single person, and even more complex for a married couple.

It is also important to keep in mind that there could be a law change before January 1, 2026. I will leave it to the reader to consider the likelihood of a change in the estate tax law before January 1, 2026.

Conclusion

While most people won’t need to worry about paying estate tax, for those who do, it is an important component of their estate planning. If estate tax is a concern, it would make sense to consider whether or not to use some or all of the current estate tax exemption amount before its scheduled reduction on January 1, 2026. Any of Boardman Clark’s trust and estate attorneys would be happy to help.