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2023 Estate and Gift Tax Report


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Pleasanton estate planning attorney breaks down 2023 estate and gift taxes.

2023 marks the highest estate and gift tax exemptions to date. After adjusting the 2022 rates for inflation, the lifetime exemption from estate and gift taxes, as well the exemption from generation-skipping transfer (GST) tax has increased to $12.92 million per person. That means that someone who passes away in 2023 with less than $12.92 million in assets won't pay any federal tax on the transfer of that wealth. Married couples have the ability to double that exemption to $25.84 million (provided certain estate planning and administration actions discussed further below are taken to preserve the decease's spouse's exemption amount).


This current large exemption is significant, because transfer taxes on estates that are greater than the exemption amount are applied at a whopping 40%. In other words, if a person passes away in 2023 owning $14 million in assets, and transfers their assets to anyone other than a US citizen spouse, that person's estate will be taxed at a rate of 40% on their $1.08 million of wealth that exceeds the current exemption, resulting in an estate tax bill of $432,000. That may sound like a lot of tax on the excess, but, historically speaking, it's extremely generous to be able to transfer nearly $13 million tax free (in contrast, twenty years ago the estate tax exemption amount was only $1 million).


Don't Bank On the Current Large Exemption


Something I reiterate to my clients week in and week out is that our current (large) exemption amount is not permanent. In 2026, the exemption amounts are scheduled to decrease to $5 million per person adjusted for inflation (so expect approximately $6 million per person). That means the same $14 million estate described above would owe $3.2 million in tax as a result of dying in 2026 as opposed to 2023. Put another way, unless the law changes, in 2026 a person will only need to own $7.08 million in assets for their estate to be subject to that same $432,000 estate tax bill (as opposed to owning $14 million in 2023 for that same result).


Of course, many estates will not be subject to estate tax even at the lower exemption amounts that are scheduled for 2026. However, when you consider that a person's taxable estate is comprised of the fair market value of all of their assets at the time of their death (consider appreciation of real estate and stocks), plus life insurance death benefits, the looming reduction of the exemption amounts is something to be mindful of now from an estate planning perspective - because it stands to affect more families than many realize.


Practical tools to plan for the reduced exemption amounts include making lifetime gifts and, for married couples, making full use of their spouse's exemption amounts.


Consider Lifetime Gifting


One way to to reduce the size of your taxable estate during your lifetime is by making gifts that qualify for the annual gift tax exclusion. Each year, the IRS allows you to make up to a certain amount of gifts to people without incurring any gift tax. In 2023, you may give away $17,000 to as many individuals as you would like without incurring gift tax and without affecting your at death estate tax exemption amount. Married couples can double the exemption and give away a combined $34,000 annually to as many individuals as they would like. In addition to the annual limits described above, certain gifts are not treated as taxable gifts and therefore circumvent the annual limits altogether. For example, if you pay medical bills for someone directly to a doctor, hospital or other medical provider, an unlimited amount is allowed with no gift tax. Similarly, gifts of educational expenses for someone made directly to the school aren't subject to the annual gift tax exclusion. Moreover, your gift tax exclusion is reset and available year after year and adjusted for inflation (meaning that if you give away $17,000 to someone this year, you can do it again tax free next year, and potentially even more so depending on the annual inflation adjustment).


Gifts made to a person in excess of the annual limits described above will use up some of that person's lifetime exemption, and that actually may be a wise strategy for some very wealthy individuals who don't need the assets. Here's why: Because the current exemption ($12.92 million in 2023) is so high, those with sufficient assets may wish to take advantage of the large exemption and make larger gifts during their lifetime in anticipation of that exemption being lower at the time of their death. Taking the above example of a person with $14 million estate, the person may decide that, in addition to making their $17,000 annual exclusion gifts, they want to give away millions to their loved ones now and apply it to their currently large ($12.92 million) exemption in order to avoid that same wealth being taxed if they live until 2026 when the exemption is scheduled to be reduced.


Estate Tax Planning for Married Couples


Although the gift tax exclusion described above is a powerful tool, it requires actually giving money or other assets now, and not everyone is comfortable with or can afford to do that.


Fortunately, married couples who are concerned about the exemption amounts being lowered in future years have some additional estate tax planning tools available to avoid their assets being taxed at their death that do not require relinquishing control and giving those assets away during their lifetime. These techniques include estate tax portability and trust estate tax planning.


Portability


A surviving spouse's ability to transfer their deceased spouse's unused federal estate tax exclusion amount to themselves by filing a federal estate tax return and electing “portability” remains in effect for 2023. Moreover, the period for a late portability election has been extended to five years after the first spouse's death. Making this election following a spouse’s death is wise if there is any concern surviving spouse’s estate might exceed the survivor’s available exclusion amount (think $ 6 million in 2026 - or sooner if the law changes before then). If your spouse died within the last five years and a portability election was not made, you should contact your tax advisor about filing an estate tax return for your deceased spouse and making a portability election now.


Trust Tax Planning


Married couples who are concerned about the value of their estate as it relates to the exemption amount (again, it is scheduled to be reduced in 2026 and may occur sooner) should consider including proactive tax planning provisions as part of their revocable living trust rather than merely relying on portability. For instance, providing the surviving spouse with the ability to disclaim assets to a bypass trust (also referred to as an exemption trust) is a popular technique that provides great flexibility to future proof the surviving spouse's estate tax planning options. This well established technique allows the surviving spouse to use the disclaimed assets for their support needs throughout their lifetime while avoiding estate taxation of those assets upon their death. In addition, the appreciation on those disclaimed assets is also sheltered from estate taxation.


As always, it's important to consult with legal and/or tax counsel when applying the above to your particular situation. For some, more advanced and sophisticated estate planning strategies that are beyond the scope of this article may be appropriate.


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