The Federal Estate Tax
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The federal estate tax applies to the taxable estate of a deceased US citizen or resident above the applicable exclusion amount. In 2024, that exclusion is $13.61 million per person — meaning only estates larger than this amount owe any federal estate tax. The top marginal rate is 40%. For a married couple, the unused exclusion of the first spouse to die can be transferred to the surviving spouse through "portability" — effectively doubling the exclusion to $27.22 million if elected on a timely filed estate tax return. Fewer than 1 in 1,000 estates currently owe federal estate tax, but the threshold is scheduled to drop dramatically after 2025.
The 2025 Sunset and Planning Window
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The Tax Cuts and Jobs Act (2017) roughly doubled the estate tax exclusion from approximately $5.49 million (2017) to $11.18 million (2018), indexed for inflation. This provision sunsets on January 1, 2026, reverting to approximately $7 million (inflation-adjusted). For individuals and couples with estates between $7 million and $13.61 million, this creates a planning window: gifts made before the sunset lock in the higher exclusion even if the law changes. The IRS has confirmed that gifts made under the current higher exclusion will not be "clawed back" if the exclusion later decreases. Taxpayers in this wealth range should consider accelerating gifts or implementing irrevocable trust strategies before the sunset date.
The Gift Tax and Annual Exclusion
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The federal gift tax is unified with the estate tax: taxable gifts made during life reduce the lifetime exclusion dollar-for-dollar. However, the annual gift tax exclusion — $18,000 per recipient in 2024, indexed for inflation — allows tax-free transfers that do not reduce the lifetime exemption at all. A couple can jointly give $36,000 per recipient annually ($18,000 each) to any number of people. Direct payments of tuition to an educational institution (paid directly to the school, not the student) and direct payments of medical expenses to a provider are excluded from gift tax without dollar limit and without affecting the annual exclusion. These direct-payment exclusions are underused — a grandparent paying a grandchild's college tuition directly can transfer substantial wealth with no gift tax consequence.
Irrevocable Trusts and Wealth Transfer
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For larger estates, irrevocable trusts allow assets to be transferred out of the taxable estate while the grantor (or their family) retains some benefits. A Grantor Retained Annuity Trust (GRAT) allows the grantor to transfer assets to a trust, receive annuity payments for a fixed term, and pass any appreciation above the IRS hurdle rate to heirs gift-tax-free — effectively a tax-efficient bet that the assets will outperform the IRS rate. A Spousal Lifetime Access Trust (SLAT) allows one spouse to gift assets to an irrevocable trust benefiting the other spouse, removing assets from the estate while maintaining indirect access. Intentionally Defective Grantor Trusts (IDGTs) allow the grantor to pay income taxes on trust income — effectively making additional tax-free gifts — while the trust assets compound without income tax drag. These vehicles are complex and require professional estate planning counsel, but for estates well above the exemption threshold, they represent the most powerful remaining wealth transfer tools in the tax code.