Federal Gift and Estate Tax Planning- Part 1 of 7: The Unlimited Marital and Charitable Deductions

As discussed in prior blogs, North Carolina does not assess an estate or inheritance tax and the federal unified gift and estate tax exclusion as of 2024 is $13,610,000 per individual and $27,220,000 for a married couple who elects portability. Accordingly, the vast majority of North Carolinians do not have taxable estates. However, with the exclusion scheduled to sunset on January 1, 2026, and thereafter be greatly reduced to affect many more North Carolinians, I’d like to provide a summary of the most effective and popular strategies to reduce or eliminate gift and estate taxes.  In part 1, I will discuss the unlimited marital and charitable deductions, in part 2 I will discuss leveraging the basic and annual exclusions, and in parts 3 through 7 I will discuss a few of the most popular advanced planning techniques. 

Using the Unlimited Marital and Charitable Deduction

Two of the simplest, yet powerful tools, to avoid federal estate tax are the unlimited marital and charitable deductions. 

Section 2056 of the Internal Revenue Code allows a taxpayer to gift or leave at death an unlimited amount of property to their spouse tax free (assuming their spouse is a U.S. citizen). An individual’s taxable estate is reduced by the total amount given or passing at death to their surviving spouse. This unlimited deduction can include property that has passed outright to the surviving spouse or property which passes via certain lifetime interests such as qualified terminable interest property if an election is properly and timely made.  In the legal world, this is typically referred to and structured as a QTIP trust.  The limitation of this planning tool is that an individual must be married to take advantage of it and, even if married, it only avoids federal estate tax at the death of the first spouse. Upon the death of the second spouse, whatever property the surviving spouse inherited from their deceased spouse, whether outright or in a QTIP trust, is part of the surviving spouse’s taxable estate and if it exceeds their lifetime exclusion of $13,610,000, or $27,220,000 if portability was elected, then the estate of the surviving spouse will be subject to federal estate tax. 

Section 2522 of the Internal Revenue Code permits an unlimited amount of lifetime gifts to qualified charities for specified purposes without gift tax being imposed. Section 2055 allows an unlimited deduction for property left to a qualified charity for specified purposes at death.  Essentially, there is an unlimited deduction from an individual’s taxable estate for inter vivos and testamentary transfers to qualified charities. Confirming the charitable organization meets the IRS definition to qualify for the deduction is of great importance before making the gift or bequest to the charity.  For a person who has no objective to leave any portion of their estate to anyone other than a qualified charity, their estate tax planning can be one of the most straightforward and, with proper planning, they can avoid all estate tax regardless of the wealth they amass. The limitation of this planning tool is that most individuals intend to leave at least a portion of their estate to individuals or non-charitable entities.  To learn more about estate tax planning, contact our office.

Estate Planning & Admin