Estate Planning & Tax Mitigation Strategies to Consider Now Prior To The Estate Tax Exemption Expiration
In 2023 you may transfer $12.92 million ($25.84 million combined portability for married couples) out of your taxable estate without any tax. This amount will reduce/reset in two (2) years when the current Federal lifetime estate tax exemption expires Dec. 31, 2025. After that date, said reduced tax exemption amount will also be adjusted for inflation, unless the current federal legislation addresses and extends or passes new tax legislation between now and then. Now is the time be proactive and address transferring wealth to heirs and charities in the next two years by reviewing same with your team of trusted advisors to include your estate planning attorney, accountant and financial advisors. Some current transfer strategies for tax mitigation to consider are:
1. Direct Gifts
2. Estate Plan to include Irrevocable Trust
3. Gifts “upstream” to parents to then distribute to grand kids
4. Maximize the Generation-Skipping Tax (GST)
5. Portability
1. Direct Gifts: Giving assets directly to recipients is one way to reduce the size of your estate. Direct gifts allow you to specify who receives gifted assets. You can give gifts of up to $17,000 per recipient ($34,000 for split gifts of married couples) in 2023 without paying taxes. The 2023 gift tax limit is $17,000 and for married couples, the limit is $17,000 each, for a total of $34,000. This amount, formally called the annual gift tax exclusion, is the maximum amount you can give a single person without reporting it to the IRS
2. Irrevocable Trust: Assets transferred into an irrevocable trust are not considered part of your estate and this will reduce your taxable estate. Trusts can be protected from creditors and managed and distributed by you as the trust grantor.
3. Gifts “Upstream:” In upstream gifting, you can gift assets to family members of a prior generations, typically a parent or grandparent. This allows you to transfer assets out of your estate while taking advantage of the recipient’s potentially lower tax bracket and higher gift and estate tax exemptions. Parents or grandparents can then use the transferred assets for their expenses and, in certain cases, distribute them to grandchildren or great grandchildren without incurring gift or estate taxes.
4. Maximize the Generation-Skipping Tax (GST): The GST exemption can preserve intergenerational wealth. Here’s a hypothetical example of how it might be used. Let’s say you want to transfer as much of your $30 million estate as possible to your grandchildren without incurring gift or estate taxes. If you leave your assets directly to your children, estate taxes will be levied when the assets are passed to your grandchildren, and then again
when your grandchildren transfer assets to their heirs. By transferring up to $12.92 million or your remaining exemption to a properly structured GST trust, those assets will be excluded from estate- tax liability to the benefit of both your children and grandchildren.
5. Portability: The portability provision of current tax law allows a surviving spouse to use any unused portion of their deceased spouse’s estate and gift tax exemption. This could add millions of dollars worth of tax exclusions
Bottom Line: The estate planning process should/can consider all available options when it comes to mitigating taxes and boosting the size of eventual inheritances. Going outside of the normal inheritance plans and gifting assets upstream can potentially expedite the transfer of assets from one generation to the next and produce a big cut in estate taxes in the process.
DiMedio Law is a New Jersey law firm whose practice includes Estate Planning, Administration, Business Services & Succession Planning and related Real Estate and other matters. Contact us at [email protected] or call us at 856-428-5577.
DISCLAIMER: This advisory is for general information purposes only. It does not constitute legal advice, and may not be used and relied upon as a substitute for legal advice regarding a specific legal issue or problem. Advice should be obtained from a qualified attorney licensed to practice in the jurisdiction where that advice is sought.
