Federal Estate & Gift Tax: What You Need to Know
The federal estate and gift tax is a unified transfer tax system that taxes the transfer of wealth from one generation to the next — whether through estates at death or gifts made during your lifetime. Understanding this system, its current exemption levels, and the significant changes on the horizon is essential for anyone with a meaningful estate to protect.
For 2024, the federal estate tax exemption is $13.61 million per individual, rising to approximately $13.99 million in 2025 with inflation adjustments. A married couple can effectively double this amount to approximately $27.22 million using the portability election, which allows a surviving spouse to use any unused portion of a deceased spouse's exemption. Estates below these thresholds owe no federal estate tax. For estates exceeding the exemption, the top federal estate tax rate is 40%.
The current elevated exemption levels were established by the Tax Cuts and Jobs Act of 2017, which doubled the pre-existing exemption. Critically, this provision sunsets after December 31, 2025. Unless Congress acts to extend or make the current levels permanent, the exemption will revert to approximately $7 million per individual (inflation-adjusted from the pre-TCJA $5 million base). For an individual with an estate of $12 million, for example, the difference between a $13.6 million exemption and a $7 million exemption is the difference between owing no federal estate tax and owing approximately $2 million.
This potential 2026 sunset creates a planning window that is closing. Transferring assets out of your estate now — while the exemption is elevated — can lock in the current exemption amount even if it later decreases. Working with a CPA to understand your estate's exposure and the available strategies is time-sensitive.
New Jersey Estate Tax & Inheritance Tax
New Jersey repealed its state estate tax effective January 1, 2018. Before the repeal, NJ imposed estate tax on estates exceeding just $675,000 — one of the lowest thresholds in the nation — and many middle-class NJ families faced state estate taxes that residents of most other states did not. The repeal eliminated this burden entirely.
However, New Jersey still imposes an inheritance tax, which is distinct from an estate tax. The NJ inheritance tax is assessed based on the relationship between the deceased person and the beneficiary:
Class A Beneficiaries (Exempt)
Spouse, civil union or domestic partner, child, grandchild, parent, grandparent, stepchild of the decedent. Class A beneficiaries pay no NJ inheritance tax.
Class C Beneficiaries (11%–16%)
Siblings, daughters-in-law, and sons-in-law. These beneficiaries face NJ inheritance tax rates of 11% to 16% on amounts above $25,000.
Class D Beneficiaries (15%–16%)
All other individuals — friends, non-family members, more distant relatives — face NJ inheritance tax rates of 15% to 16% on all taxable transfers. This rate applies with no exemption amount.
For NJ residents who wish to leave assets to siblings, friends, or more distant relatives, planning around the NJ inheritance tax can be just as important as federal estate tax planning. Careful beneficiary designations, trust structures, and lifetime gifting can reduce or eliminate NJ inheritance tax exposure.
Gift Tax & Lifetime Gifting Strategies
The federal gift tax and estate tax share a single lifetime exemption — the same $13.61 million (2024) that shields estates from tax also applies to taxable gifts made during your lifetime. However, the annual gift tax exclusion allows you to make gifts up to a certain amount per recipient each year without affecting your lifetime exemption at all.
For 2024, the annual exclusion is $18,000 per recipient. A married couple can combine their exclusions through gift splitting to give $36,000 per recipient annually. For a couple with three adult children, this means $108,000 per year in tax-free wealth transfer — $1 million over approximately nine years — without ever touching the lifetime exemption. When gifts also include grandchildren and other family members, the annual gifting capacity compounds further.
In addition to annual exclusion gifts, certain payments are excluded from gift tax entirely: direct payments of medical expenses and tuition paid directly to an educational institution or healthcare provider are excluded without limit and do not count against either the annual exclusion or lifetime exemption. These "super exclusion" opportunities are frequently underutilized by families with the means to make them.
Gifts exceeding the annual exclusion require the filing of IRS Form 709 (Gift Tax Return) and reduce the available lifetime exemption by the excess amount. While no gift tax is owed until the exemption is exhausted, reporting is required. ProAxis helps clients structure and document gifting programs to ensure compliance while maximizing the wealth transfer.
Estate Planning Strategies We Support
Irrevocable Life Insurance Trusts (ILITs)
Life insurance proceeds are generally included in your taxable estate if you own the policy. An ILIT owns the policy instead, keeping the proceeds outside your estate while still making them available to your heirs. This is particularly valuable for NJ business owners who carry large life insurance policies for buy-sell purposes.
Spousal Lifetime Access Trusts (SLATs)
A SLAT allows one spouse to make a gift to an irrevocable trust for the other spouse's benefit, removing the gifted assets from both spouses' taxable estates while retaining indirect access through the beneficiary spouse. With the 2026 sunset approaching, SLATs are one of the most actively discussed strategies for capturing the current elevated exemption before it potentially decreases.
Family Limited Liability Companies (FLLCs) & Valuation Discounts
Transferring assets — particularly business interests, investment portfolios, or real estate — into a family LLC and then gifting or selling minority interests to family members can allow for valuation discounts (lack of marketability, lack of control) that reduce the value attributed to transferred interests for gift and estate tax purposes. A 20%–30% valuation discount effectively stretches the estate tax exemption further.
Grantor Retained Annuity Trusts (GRATs)
A GRAT allows you to transfer appreciating assets out of your estate at little to no gift tax cost. You receive annuity payments from the trust for a fixed term, and any growth in trust assets above a hurdle rate (the IRS §7520 rate) passes to beneficiaries free of estate and gift tax. GRATs work best for assets expected to appreciate significantly above the hurdle rate.
Charitable Giving Strategies
Charitable remainder trusts, charitable lead trusts, and donor-advised funds can help reduce estate and income taxes while supporting causes you care about. For NJ families with significant appreciated assets, charitable planning can be both philanthropically meaningful and financially strategic.
Frequently Asked Questions
Is there still a New Jersey estate tax?
New Jersey repealed its state estate tax effective January 1, 2018 — a significant relief for NJ families. However, NJ still has an inheritance tax based on the relationship between the decedent and the beneficiary. Class A beneficiaries (spouse, children, parents, grandchildren) are fully exempt from NJ inheritance tax. Class C beneficiaries (siblings, in-laws) face rates of 11%–16% on amounts above $25,000. Class D beneficiaries (unrelated individuals, more distant relatives) face 15%–16% rates on all transfers. Federal estate tax still applies to estates exceeding the federal exemption amount.
What is the current federal estate tax exemption?
For 2024, the federal estate tax exemption is $13.61 million per individual (approximately $13.99 million in 2025), or approximately $27.22 million for a married couple using portability. The top estate tax rate is 40% on amounts above the exemption. Critically, the current elevated exemption is scheduled to sunset after December 31, 2025, potentially reverting to approximately $7 million per individual — creating an urgent planning opportunity for individuals with estates approaching that threshold.
What is the annual gift tax exclusion?
The annual gift tax exclusion for 2024 is $18,000 per recipient ($19,000 in 2025). Gifts within this amount per recipient per year do not require a gift tax return and do not reduce your lifetime exemption. A married couple can give $36,000 per recipient through gift splitting. Direct payments of medical expenses and tuition paid to providers are excluded from gift tax without limit and represent an often-underutilized wealth transfer opportunity for families with the means to use them.
When should I start estate planning?
Estate planning is not just for the wealthy or elderly — it is appropriate for anyone with assets, dependents, or a business interest. The right time to start is now. The most effective strategies work best when implemented over time rather than in a last-minute rush. Given the scheduled 2026 federal exemption sunset, individuals with estates approaching $7 million per person should be actively reviewing their plans in 2024 and 2025 to capture the current elevated exemption before it potentially decreases. We coordinate with your estate planning attorney to ensure the tax strategy aligns with your legal documents.