With the current unified federal gift and estate tax exemption (exemption) expected to sunset in 2026, now is an opportune time to ensure you maximize this tax savings opportunity. Currently, the exemption has been doubled and inflation has boosted it even further. For individuals who make gifts in 2024 or die in 2024, the exemption is $13.61 million (effectively $27.22 million for married couples), unless any portion of it was utilized in a previously filed gift tax return.

Unfortunately, this exemption is scheduled to revert to its levels prior to the Tax Cuts and Jobs Act (TCJA) after 2025, unless Congress extends it. While the future of this exemption remains uncertain, taxpayers should consider transferring wealth to the next generation now — while the tax laws are favorable and asset values may be lower because of uncertain market conditions.

Gift & Estate Tax Basics

Under the TCJA, the exemption increased from $5 million to $10 million, with annual indexing for inflation. Taxable estates that exceed the exemption amount now have the excess taxed at a flat 40% rate.

In addition, cumulative lifetime taxable gifts that exceed the exemption amount are now taxed at a flat 40% rate. Taxable gifts are those that exceed the annual federal gift tax exclusion (exclusion), which is $18,000 for 2024. If you make gifts in excess of the exclusion, the excess reduces your exemption dollar-for-dollar. Under the unlimited marital deduction, most transfers between spouses are not subject to the federal estate and gift tax. However, this deduction is limited if the spouse is not a U.S. citizen.

For example, suppose an unmarried taxpayer gifted private stock to 10 family members valued at $1.18 million in 2024. After the annual gift tax exclusion is applied totaling $180,000, the exemption can shelter the remaining $1 million from gift tax. That leaves $12 million of exemption available for estate and or gift tax planning (assuming the taxpayer did not utilize any part of their exemption in a previous year).

Valuation

Determining the value of a gifted asset can also prove to be challenging especially when there is no market in which it can be valued. This question needs to be answered before taxpayers can make decisions about how much can be gifted or what value needs to be included on a decedent’s estate tax return.

For gift and estate tax purposes, IRS Revenue Ruling 59-60 identifies eight factors to help taxpayers evaluate non-publicly traded stock. These factors include:

1. The company’s nature and history.
2. The outlook for the industry and economy.
3. The company’s book value and financial condition.
4. Its earnings capacity.
5. How much dividends the company could (or does) pay out.
6. The value of goodwill and other intangible assets.
7. Prior sales of the company’s stock and the size of the block.
8. The price paid in comparable stock transactions.

In addition, taxpayers' ownership interests may be eligible for discounts for lack of control and marketability.

As valuations are an integral part of the filing of an estate and or gift tax return, we strongly advise taxpayers to hire a business valuation professional to provide valuations in these circumstances. These experts understand how to prepare valuations for gift and estate tax reporting purposes and their reports should provide sufficient detail to the IRS regarding how an asset was valued.

State Concerns

Taxpayers should also consider whether the state they reside in imposes an estate or gift tax, as the above discussion is based only on federal tax law.

Plan Now

Making lifetime gifts to remove assets that will appreciate in value is sound estate and gift tax planning. The current available exemption, gift tax annual exclusion and proper valuation of the transferred assets are all things to consider in the planning process. We are here to assist with your gift and estate tax planning and how to utilize each of them to help mitigate your overall exposure, especially before the exemption is reduced at the end of the 2025 tax year.

For assistance with developing a tax-smart gifting and estate tax strategy, Doeren Mayhew's estate and gift tax professionals are here to show you the way.