Year-End Estate Planning for 2023

A strong stock market and “soft landing” have generated significant wealth this year. The gift tax, estate tax and generation-skipping transfer tax are all imposed on the fair market value of assets at the time of transfer. Gifts and other transfers now may allow you to leverage your exclusions and exemptions, freeze the current prices of assets and pass on future appreciation to the next generation. 

How can you take advantage?

• The gift tax annual exclusion allows you to give $17,000 ($34,000 for married donors) to as many individuals as you choose. In 2024, the annual exclusion is inflation-adjusted to $18,000/$36,000. It is better to make your gifts early in the year, to move more appreciation and income to your beneficiaries and to ensure the gifts are made during your life.
• The federal gift and estate tax lifetime exemption is $12.92 million for 2023 and $13.61 million for 2024. Double it for married couples. However, these historically high exemptions are scheduled to sunset by 50% in 2026, so consider making significant gifts soon.
• If a married couple is concerned that substantial gifts would reduce their cash flow, consider a Spousal Lifetime Access Trust (SLAT) where one spouse uses his or her gift tax exemption to create a trust for the other spouse. The SLAT will not be subject to estate tax when the beneficiary spouse dies. Do it now to avoid the sunset of the exemption mentioned above.
• Consider creating a Grantor Retained Annuity Trust (GRAT). You place assets in a trust that pays you an annuity of 100% of the original principal value plus interest for a term of years. Any appreciation in excess of your retained annuity passes to your beneficiaries free of gift and estate tax at the end of the term. This is a gamble you cannot lose; if asset values do not rebound, you get everything back at no tax cost.
• You can sell business or financial assets to an Intentionally Defective Grantor Trust (IDGT) for a promissory note with no gift or estate tax consequences, freezing their current value and moving all appreciation to your beneficiaries. There is no capital gains tax on the sale to the IDGT. The cash flow from the promissory note could replace the lost income from the assets sold to the IDGT.
• Some elected officials consider the techniques described above as “abusive”, have called for the Treasury Department to use its regulatory authority to prevent such abuses, and also have proposed legislative fixes. There is no guarantee that all of these techniques will be available in the future.
• Many states like NY and IL have an estate tax but no gift tax. NY does not have a gift tax and lifetime gifts are not subject to NY estate tax unless made within three years of death. Why wait?
• There is an income tax due when you convert a traditional IRA to a Roth IRA, so it is best to make the conversion when the market is down. With a Roth IRA, there is no Required Minimum Distribution (RMD) and no income tax on future distributions to you or your beneficiaries. For a traditional IRA, a Qualified Charitable Distribution (QCD) allows an individual who is 70½ years or older to donate up to $100,000 to charity. The QCD counts towards the individual’s RMD and may be advantageous for income tax purposes.
• Consider creating a revocable trust to hold all of your assets. The trust takes the place of a Will, is tax neutral and allows a successor trustee (whom you name) to step in and manage your assets if you become incapacitated. Equally important, a revocable trust saves time and expense at your death by avoiding probate and providing immediate access to your assets.