Blog, Tax Management

What Is the Federal Estate Tax Exemption and How Can You Leverage It?

The federal estate tax exemption is one of the most impactful tools in estate planning. it can help you transfer significant wealth to your loved ones without incurring federal estate taxes. Whether you are building your legacy or ensuring financial security for your family, understanding this exemption is essential.

What is the Federal Estate Tax Exemption?

The federal estate tax exemption is the amount you can transfer to your heirs tax-free upon death. For 2024, this exemption is $13.61 million per individual, meaning any estate valued below this amount is not subject to federal estate taxes.

For married couples, the combined exemption doubles to $27.22 million. This can be utilized effectively with proper planning to help shield your wealth from taxation.

Anything exceeding the exemption threshold is taxed at up to 40%. This underscores the importance of incorporating the exemption into your estate planning strategy.

The exemption is not a static figure. It is adjusted annually for inflation and influenced by legislative changes. Without action from Congress, the exemption will revert to $5 million per person, adjusted for inflation, in 2026.

Calculate Your Estate’s Taxable Value

Begin by determining the value of your estate. Include real estate, financial investments, business holdings, and personal property.

Subtract liabilities and debts from the total to calculate the taxable portion of your estate.

If your estate exceeds the current exemption, adopting strategies to mitigate the tax burden is crucial. Even estates below the threshold can benefit from planning, as the exemption amount is subject to change.

Use Lifetime Gift Tax Exemptions

Lifetime gifts are an effective way to reduce the size of your taxable estate. The lifetime gift tax exemption matches the estate tax exemption at $13.61 million for 2024. This allows you to gift assets during your lifetime without incurring gift taxes as long as the total remains within this limit.

Annual gifts offer another opportunity to reduce your taxable estate. For 2024, you can give up to $18,000 per recipient per year without affecting your lifetime exemption.

Making these gifts ensures your wealth benefits your heirs while reducing the portion of your estate subject to taxation. It also allows you to witness the impact of your generosity during your lifetime.

Establish a Bypass Trust

A bypass trust is a powerful tool for married couples. When the first spouse dies, their share of the estate funds the trust. This portion is shielded from estate taxes and generates income for the surviving spouse.

When the second spouse dies, the trust assets transfer to the heirs without additional taxation. This approach leverages both spouses’ exemptions and preserves wealth for future generations.

In addition to tax benefits, a bypass trust controls how and when assets are distributed to beneficiaries.

Maximize Portability Between Spouses

Portability provisions allow a surviving spouse to use any unused portion of their deceased spouse’s estate tax exemption. A federal estate tax return must be filed upon the first spouse’s death, even if the estate owes no taxes to claim this benefit.

Portability simplifies planning by enabling couples to maximize their combined exemption without the need for complex trust structures. It ensures that a more significant portion of their estate is protected from taxation.

Utilize Irrevocable Life Insurance Trusts

Life insurance proceeds can significantly increase the value of an estate, potentially pushing it above the exemption threshold. By transferring a life insurance policy ownership to an Irrevocable Life Insurance Trust (ILIT), you exclude its value from your taxable estate.

The trust receives the policy’s proceeds upon your death and distributes them to beneficiaries tax-free. This strategy provides financial support to your loved ones without increasing the tax burden on your estate.

An ILIT is particularly useful for estates with high-value life insurance policies or those close to the exemption limit.
Plan for State Estate Taxes

Some states impose their own estate or inheritance taxes with exemption thresholds much lower than the federal level. If you reside in a state with these taxes, they can significantly impact your heirs’ inheritance.

Strategies to mitigate state taxes include relocating to states without estate taxes or utilizing state-specific exemptions. Each state has unique rules, so understanding local regulations is critical.

A well-crafted plan aligns with federal and state laws to minimize the overall tax burden on your estate.

Anticipate Changes to the Exemption

The federal estate tax exemption may decrease in 2026. Planning now can help you take advantage of the current higher limits. This may involve accelerating asset transfers or creating trusts before the exemption decreases.

Stay informed about legislative changes to ensure your estate plan remains adequate. Working with a financial advisor or estate attorney ensures your strategy adapts to new laws.

Consider Charitable Giving Strategies

Charitable giving offers a dual benefit: supporting causes you care about while reducing your taxable estate. Contributions to qualified charities are excluded from your estate’s taxable value.

Donor-advised funds, charitable remainder trusts, and outright donations are popular options. These strategies allow you to leave a legacy of generosity while optimizing tax savings.

Charitable giving also allows you to align your financial plan with your values, to see to it your wealth makes a meaningful impact.

Seek Professional Advice

Estate planning is complex and requires expertise to navigate effectively. A qualified financial advisor or estate planning attorney can help you design a strategy tailored to your needs and goals.

Professionals guide you through decisions like gifting, trust creation, and tax planning. They ensure your plan complies with legal requirements and maximizes the federal estate tax exemption benefits.

Collaborating with experts provides a sense of reassurance, knowing your estate is structured to protect your legacy and support your loved ones.

Reassess Your Plan Regularly

Life events like marriage, divorce, births, or changes in financial circumstances can affect your estate plan. Periodic reviews ensure your strategy remains aligned with your goals and current laws.

Regular updates allow you to adjust for new exemptions, tax laws, or personal priorities. This proactive approach keeps your estate plan effective and reflective of your wishes.

Final Thoughts

The federal estate tax exemption is a cornerstone of effective estate planning. By leveraging this provision, you can preserve wealth, reduce tax obligations, and provide for your heirs.

Taking action now ensures you benefit from current limits, which may not last indefinitely. Strategies like gifting, trusts, and portability offer practical ways to secure your estate and create a meaningful legacy.

Work with a professional to develop a comprehensive plan tailored to your situation. With the proper guidance, you can navigate the complexities of estate planning and gain a sense of reassurance regarding your finances.

 

Disclaimer: There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.