In 2023, significant changes were made to the estate tax exemptions at both the federal and state levels.
Increases to Federal Estate Tax Exemptions and Annual Exclusion Amount
The federal gift/estate tax exemption and GST tax exemption increased from $12,060,000 to $12,920,000, marking an $860,000 increase. Additionally, the federal annual exclusion amount rose from $16,000 to $17,000.
Illinois Estate Tax Exemption Increase
At the state level, Illinois increased its estate tax exemption under the Illinois Estate and Generation-Skipping Transfer Tax Act. For individuals who pass away on or after January 1, 2023, the exclusion amount is now $8,000,000, up from the previous $4,000,000.
Other State-Level Estate Taxes
It’s crucial to be aware of state-level estate taxes, which vary from state to state. Even if an estate qualifies for the federal estate tax exemption, it may still be subject to a state-level tax. As of 2023, Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, Hawaii, and the District of Columbia all levy estate taxes.
Estate Planning Strategies to Minimize Tax Burden
Estate planning is essential for those whose estates may be subject to these taxes. Clients can take advantage of the increased exemption amounts by making lifetime gifts, either outright to an individual or in a trust. It’s important to consider making gifts to reduce estate tax before the exemptions decrease at the end of 2025. For those who have already used their gift and estate tax exemption in prior years, the increase from 2022 to 2023 provides an opportunity to make additional lifetime gifts to avoid or reduce estate tax.
The local tax requirements for estate tax in 2023 vary depending on the state in which the estate is located. It’s essential to be aware of both federal and state-level estate tax exemptions and plan accordingly to minimize the tax burden on beneficiaries.