With the New Year approaching, there may be some estate and gift tax steps you should consider before year-end or in anticipation of 2023. Here is some information to keep in mind.
The Tax Cuts and Jobs Act (TCJA) went into effect in 2018 and modified deductions, depreciation, expensing, tax credits, and other tax items that affect businesses, which will continue to significantly impact taxpayers through 2025. Most notably for estate planning purposes, the TCJA doubled the estate, gift, and generation-skipping transfer (GST) tax exemptions. With no action from Congress, on January 1, 2026, the laws (including the increased exemptions) will revert back to those that existed prior to the TCJA. Given our uncertain political landscape, individuals should plan, where appropriate, to take advantage of the increased estate, gift, and GST tax exemptions.
Major income and transfer tax exemption and rate changes have been introduced under the TCJA, including inflation adjusted amounts for 2022 and 2023:
- For 2022, the federal estate, gift, and GST applicable exclusion amounts has been $12.06 million. The maximum rate for federal estate, gift, and GST taxes is 40%.
- For 2023, the federal estate, gift, and GST applicable exclusion amounts will be $12.92 million. Barring any changes from Congress, the maximum rate for federal estate, gift, and GST taxes will remain at 40%.
- Make annual exclusion gifts of $16,000 ($32,000 for married couples).
- Make IRA contributions.
- Set up 529 Plan accounts for children/grandchildren and consider including five years’ worth of annual exclusion gifts, taking into account any gifts made during the year to children/grandchildren.
- Submit tuition/non-reimbursable medical expenses directly to the school or medical provider.
- Contemplate making charitable gifts (including charitable IRA rollovers) to apply the deduction toward your 2022 income tax return. Make the qualified charitable distribution directly from your IRA to satisfy your Required Minimum Distribution (RMD) to exclude it from your taxable income.
- Preserve your estate tax exemption. Your estate is not subject to the federal estate tax if the value of your estate is less than the exemption amount. A married couple will be able to protect up to $25.84 million from federal estate tax with proper estate planning (2022’s amount is only $24.12 million total).
- Create and fund a Grantor Retained Annuity Trust (GRAT). A GRAT is an irrevocable trust created for a certain period of time. Assets are placed under the trust and then an annuity is paid out to you every year. When the trust expires and the last annuity payment is made, assets pass to beneficiaries outright or preferably remain in trust for the beneficiaries.
- Create and fund a Qualified Personal Residence Trust (QPRT). A QPRT is also an irrevocable trust. It allows you to transfer your home at a discounted rate.
- Non-grantor trusts to arrange income distributions to beneficiaries as it may be taxed at a lower taxed rate.
- Initiate intra-family lending. This type of loan transfers part of the wealth earnings to your family member without lowering your lifetime estate tax exemption or paying gift taxes.
- Initiate a freeze transaction. In this type of transaction, future growth in investments are removed from your taxable estate.
- Secure life insurance. This type of policy presents significant opportunities to defer and/or avoid income taxes, as well as provide assets to pay estate tax or replace assets used to pay estate tax. Taxpayers may wish to review or reevaluate their life insurance coverage and needs with their insurance advisors.
