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2023 Estate and Gift Planning Update

Included among the IRS inflation adjustments for tax year 2023 were changes to estate, gift and generation-skipping transfer (GST) tax exemptions. Under the Tax Cuts and Jobs Act (TCJA), estate, gift and GST exemption amounts are at an all-time high, but assuming there are no changes in the law beforehand, the current exemption amount is due to sunset on January 1, 2026. The increased exemption amounts offer planning opportunities for 2023.

The following provides a summary of key exemptions and credits for 2023, along with planning considerations:

2023 Increases in Exemptions/Credits:

  • Annual exclusion gifts The 2023 annual gift tax exclusion amount is $17,000 per donee, or $34,000 for married couples that split gifts.
  • Federal gift and estate tax exemption – The amount that can be given during an individual’s lifetime, or upon death that is exempt from federal estate and gift taxes is $12.92 million, or $25.84 million per married couple. The same amounts apply for the Federal GST exemption in 2023. While New York does not have a state gift tax, if a donor plans on doing lifetime gifting, they must consider if the state in which they reside has a state gift tax.
  • Transfers to Non-Citizen Spouses – For spouses that are US citizens, there is an unlimited marital deduction for gift and estate tax purposes, meaning there is no limitation on how much can be transferred to a US citizen spouse, during lifetime or upon death. However, for gifts to non-citizen spouses, the marital deduction is increased to $175,000 in 2023.
  • 401(k) contributions – An individual can contribute $22,500 if under age 50, while those 50 and older can contribute $30,000 this year. Employer contributions are on top of that limit.

Planning Considerations in Light of Increased Exemptions and High Interest Rates

Irrevocable Trusts for the Benefit of the Spouse

  • If an individual wishes to use all or a portion of their lifetime gift and estate tax exemption while the increased amount is available but is concerned about locking into an inflexible irrevocable trust, many taxpayers are considering implementing a Spousal Lifetime Access Trust (SLAT), an irrevocable trust for the primary benefit of the spouse and ultimately the children. By establishing and funding the SLAT, the donor can accomplish the following:
    1. Utilize all or a portion of their respective federal gift and estate tax exemption, which means the trust assets will not be includable in their taxable estate, in the taxable estate of the spouse, and if structured with continue trusts for the children, not includable in their taxable estates
    2. All of the appreciation of the transferred assets grows within the irrevocable trust and outside of the taxable estate for the benefit of the children and future grandchildren.
    3.  The spouse, as one of the trust beneficiaries, will have access to the trust assets, if necessary
    4. The SLAT provides the beneficiaries with asset protection from third party creditors; and
    5. Have the flexibility to design how the trust assets will ultimately pass to children and future grandchildren

Irrevocable Trusts that Qualify for the Annual Exclusion Gifts

  • If an individual or couple would like to utilize their annual exclusion gift for one or more loved ones but are hesitant to make an outright transfer of funds due to the fact that the beneficiary is a minor, a young adult who may not have the financial maturity to have control of a sum of money, or a beneficiary with potential creditor issues, the donor can consider making annual exclusion gifts to an irrevocable trust for the intended beneficiary. In order to qualify for the annual exclusion gift treatment, the trust must require the trustees to give notice of a trust contribution to the beneficiary, or their guardian if the beneficiary is a minor, and they must be given a timeframe in which they have the right to withdraw the contribution. This right of withdrawal makes the gift to the trust a “present interest” and therefore qualifies for the annual exclusion. Assuming the beneficiary does not exercise their right to withdraw the funds, the gift continues to be held and administered in accordance with the trust terms designed by the donor. Unlike a custodial account under the Uniform Transfers to Minors Act (UTMA), where the donor is the custodian on the account and the asset is turned over to the minor child when he or she attains a set age, i.e., age 21, with an irrevocable trust, the donor can design the terms of the trust which can include a requirement that the gifted funds be held in trust for a longer period. In addition, if a donor makes an UTMA transfer and dies while serving as custodian, the value of that account is includable in the estate of the donor. If, however, the funds are contributed to an irrevocable trust that is drafted properly, the assets of the trust would not be part of the donor’s estate for estate tax purposes. With an irrevocable trust, the donor can design the trust agreement to have flexible distribution provisions and appoint key people to oversee the gifted funds for the beneficiary. If structured as a trust for one beneficiary, with certain limitations, the donor himself can serve as trustee of the irrevocable trust and still have the benefit of the gifted fund being excluded from his taxable estate.
  • A major benefit of making gifts to an irrevocable trust is that the terms of the trust can be as broad or restrictive as the donor wishes and can allow the trustee to use the funds for the beneficiary for many reasons. Unlike a 529 Plan, for example, where funds can only be used for education related expenses, the terms of an irrevocable trust can provide that the assets be used for the beneficiary’s health, education, support and maintenance, and/or the trustees can be given broad discretion to make distributions for any purpose the trustee deems appropriate.
  • Utilizing the irrevocable trust vehicle to make annual exclusion gifts, allows the donor to build in flexibility and continued protection for the beneficiary in an estate tax effective way.

Supercharge the 529 plan

  • Considering the increased annual exclusion gifts, one might consider making an annual exclusion gift to a 529 plan which is a special investment account that allows a donor to set aside funds for education expenses for a designated beneficiary and offers certain income tax benefits. Also, a donor can make a five-year contribution to a 529 Plan at one time that will still qualify for the annual exclusion gift and will not use any of the donor’s lifetime estate and gift tax exclusion. For 2023 that five-year contribution amount is $85,000.  By funding the 529 Plan upfront, it is deemed that the donor has made an annual exclusion gift to the 529 Plan beneficiary every year for 5 years.
  • 529 Plan Rollover – Starting in 2024, under the Secure Act 2.0, unused 529 plan balances up to $35,000 may be converted to a Roth IRA. The 529 plan must have been open for more 15 years, and the rollover is subject to the Roth annual contribution limit (limit based on taxpayer’s AGI is waived). Additionally, the rollover cannot exceed aggregate amount contributed to the account more than five years before the rollover.

Planning in a High Interest Rate Environment

  • With increasing interest rates, one may consider implementing trust planning techniques whereby the donor retains the right to use and occupy or receive an annuity from the transferred asset for a period of years and at the end of the trust term, the transferred asset passes to the intended beneficiaries and is removed from the donor’s taxable estate. For gift tax purposes, the value of the gift is based on the present value of the beneficiary’s right to receive the property at the end of the trust term. The value of the gift is calculated at the time of the transfer, and assuming the donor survives the trust term, the gifted asset and all future appreciation of that asset will be outside of the donor’s taxable estate. Higher interest rates impact the value of the taxable gift which may make it a more tax advantageous transfer, depending on the asset, or give more credence to the bona fide nature of the gift, which could help the planning pass muster with the IRS if challenged.
  • Two popular planning techniques that include this concept of the donor retaining certain rights or enjoyment over the transferred assets for a term of years are Qualified Personal Residence Trusts (QPRT) which involve the transfer of one’s home to a trust for remainder beneficiaries and a Charitable Remainder Annuity Trust (CRAT) where the donor transfers a certain sum to a trust and retains the right to an annuity for a period of years and at the end of the term the assets pas to the charitable organization of the donor’s choice. In April of 2022, the IRS issued proposed regulations that may make some of these planning techniques less attractive from an estate tax planning prospective, so the donor’s global estate and income tax plan and overall objectives should be considered when deciding if these planning techniques are appropriate for them.

Northeastern State Considerations

  • New York – The 2023 NYS estate tax exemption amount is $6.58 million per person. This amount is not portable to the surviving spouse; if it’s not used, it’s lost. Therefore, it’s important to plan to ensure that each spouse is able to take advantage of the NYS estate tax exemption. One way this can be done is by retitling marital assets to ensure that both spouse’s fund their estates to take advantage of the exemption. Another way to accomplish this goal is for a couple’s wills or revocable trusts to include a credit shelter trust to be funded with the NYS estate tax exemption which can also be funded with a qualified disclaimer. When a surviving spouse disclaims an asset, he or she renounces direct ownership of a particular asset that would otherwise pass to him or her and instead, pursuant to the term of a decedent’s will or revocable trust, the asset is directed to a trust for the benefit of the spouse and ultimately, for the remainder beneficiaries, i.e., children or other intended beneficiaries. Having a will or trust that provides for the creation of a credit shelter trust if a spouse disclaims or renounces direct ownership of an asset, builds in flexibility for the surviving spouse to do postmortem tax planning at the time the first spouse passes away. It allows the surviving spouse to work with his or her advisors to consider the overall needs of the surviving spouse, the federal and state estate tax laws and the size of the remaining estate at that time.
  • Connecticut – The 2023 CT estate tax exemption amount is $12.92 million per person and now matches the federal exemption. Like NY, CT does not allow portability of a deceased spouse’s state exemption so if a decedent does not use it, it’s lost.
  • New Jersey – NJ does not have a state estate tax, however it does have an inheritance tax to be paid by certain beneficiaries who receive an inheritance from a NJ resident. If certain beneficiaries receive property valued at $500 or more, they may be required to pay a NJ inheritance tax. Since NJ does not have a gift tax, and in light of the increased gift and estate tax exemptions, if a NJ resident intends for close family members (who are not lineal descendants) or friends to receive a benefit from his or her estate, they might consider making lifetime gifts to those beneficiaries, as opposed to leaving beneficiaries a bequest at death, to avoid beneficiaries from being responsible for an inheritance tax.
    • Another consideration is, if under a will, the NJ resident intends to leave an illiquid asset to a beneficiary who will be subject to the inheritance tax, that same donor might consider making annual exclusion gifts or additional lifetime gifts of liquid assets to that same beneficiary, outright or in trust, so if and when that beneficiary has an inheritance tax liability he or she has the wherewithal to pay the tax from the funds gifted to him or her by the donor during lifetime.

Every situation is different and specific circumstances need to be considered when determining the best approach for estate and gift planning. Contact the Janover team to discuss the best options for you.

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