Deciphering Estate Tax Exemptions

Estate tax, also called the death or inheritance tax, is the tax imposed on property transferred after an individual’s demise. It’s a tax mechanism aimed at generating revenue for the government and preventing the concentration of wealth in a few hands. The tax is calculated based on the value of the deceased’s estate, including their assets, properties, and investments. But there are estate tax exemptions that, if you understand your eligibility, can become a cornerstone of effective estate planning

The present Estate Tax exemption

The federal estate tax exemption is adjusted annually for inflation. As of 2024, the exemption is $13.61 million per individual or $27.22 million for a married couple. So, if your estate’s total value falls below this limit, your heirs will not be subject to federal estate taxes upon your death. 

When planning your estate, consider the impact of lifetime gifting on the exemption. Gifting assets while alive can reduce the total value of your estate, thus potentially minimizing the estate tax burden—but understand the implications before making substantial gifts. Perhaps consult with a certified financial advisor.  

Optimizing your estate tax exemption involves meticulous planning and careful consideration. Establishing trusts, utilizing annual exclusion gifts, and leveraging spousal portability can help safeguard your assets and lower estate tax liability. This ensures your loved ones gain the maximum benefit from your estate. Brighton Jones works with families to use these strategies to reduce federal and state tax liabilities and maximize the legacy that ultimately passes to their children or beneficiaries.  

Understanding State Estate Tax

Understanding the various regulations surrounding estate taxes is crucial for estate planning. While federal estate taxes apply nationwide, each state has its own rules for state estate taxes. This section provides an overview of state-specific estate tax regulations, compares them to federal estate taxes, and discusses their implications for estate planning. 

State-specific estate tax regulations can vary significantly. Some states have a separate tax system from the federal government, while others adhere to federal estate tax guidelines. Awareness of your state’s rules is vital to ensure your estate planning aligns with the applicable regulations. For example, across the West Coast alone, a broad spectrum of estate tax exemptions; Washington has an exemption of $2,193,000. Oregon has the lowest exemption in the nation at $1,000,000, while California is one of 38 states that does not impose a death tax on estates. With clients across the country and states having lower estate exemptions, we spend much of our time planning for state-specific strategies to aid our clients in buttoning up their estate plans.   

Looking ahead: The future of Estate Tax

Potential changes to estate tax laws will significantly impact individuals and families planning for wealth transfer. The most important change currently slated is a reduction to estate tax exemptions as the current Tax Cuts and Jobs Act (“TJCA”) tax regime sunsets or expires. Starting January 1, 2026, the existing lifetime estate and gift tax exemption will be halved and adjusted for inflation; the current $13.61 million that we currently have, which is the highest the exemption has ever been, will be reduced to approximately $7 million. Families anticipating estate tax obligations in 2026 could gain from promptly transferring assets and the value out of their estate. This can be in gifting or strategically setting up your estate plan with trusts to take advantage of the full lifetime exemption before it is reduced. 

It is essential to stay informed about potential changes in estate tax laws and consult with professionals who can provide guidance based on your specific circumstances. By staying proactive and adapting your estate plan, you can ensure your wealth is protected and transferred according to your wishes. 

Strategies for estate tax planning

When it comes to estate planning, understanding how to minimize estate tax liabilities is key to ensuring your loved ones receive the maximum possible inheritance. Here are some strategies to consider: 

• Reducing estate tax liabilities: Various techniques are available to minimize estate tax liabilities. A common approach is to gift assets during your lifetime, which can help decrease the overall value of your estate. Utilizing annual gift tax exclusions and the lifetime exemption amount can also be effective. We work with a family for whom we are modeling the tax savings of gifting before the exclusion drops. A sizeable strategic gift before 2026 is projected to save over $30 million in taxes throughout the portfolio’s life. Gifting at these higher exemptions provides opportunities for colossal savings when structured correctly. 
• Using trusts and other estate planning tools: Trusts are important for estate tax planning. Setting up a trust allows you to transfer assets and property to beneficiaries while retaining control over them. Certain types of trusts, such as irrevocable life insurance trusts (ILITs) and charitable remainder trusts (CRTs), can provide tax advantages and help reduce estate tax burdens. Another family we work with has set up two separate trusts to work specifically around the Oregon $1 million exemption. Even for those who aren’t worried about the larger federal exemption, smart planning and the use of strategies such as trusts can also save tax dollars at the state level.  
• Collaborating with experienced professionals for effective planning: Estate tax planning is complex, and it’s crucial to collaborate with experienced professionals who specialize in this area. An estate planning attorney, a certified public accountant (CPA), or a financial advisor can help you navigate the intricacies of estate tax laws and develop a comprehensive plan tailored to your specific circumstances. 

By implementing these strategies and seeking professional guidance, you can effectively plan your estate and potentially minimize estate tax liabilities. At Brighton Jones, our team of experts is committed to helping individuals and families navigate the complexities of estate planning. Contact us today to learn more about how we can assist you in achieving your estate planning goals.