Estate Planning

2023 Tax Strategies

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Nobody likes inflation, but recent high inflation has produced a silver lining in terms of increased exclusions to the estate and gift tax exclusion amounts for 2023. While this is good news in the short term, taxpayers should remain aware that in the absence of Congressional action, many of the tax benefits provided by the Tax Cuts and Jobs Act of 2017 are set to expire at the end of 2025. Now is the time to consult your estate planning attorney to ensure that you’re maximizing the advantage gained by the new exclusion amounts while you can.

New Exclusion Amounts

As of January 1, 2023, the annual gift tax exclusion rose to $17,000, up from $16,000. The last two years have seen increases of $1,000 after a four-year period when the exclusion remained steady at $15,000. In addition, the allowable amount for gifts to noncitizen spouses who are not included in the total amount of taxable gifts rose to $175,000, up from $164,000.

The unified gift and estate tax exemption—that is, the total amount of gifts an individual can make in their lifetime and at death before owing gift or estate tax—also rose effective January 1, from $12.06 million to $12.92 million. Married couples can receive a $25.84 million exemption, allowing them to shield an additional $1.72 million. However, the provisions of the Tax Cuts and Jobs Act passed in 2017 are scheduled to sunset at the end of 2025, halving the exemption amount unless Congress takes action to extend those benefits.

Take Advantage of the Higher Gift Exclusion

Year-end gift giving is a good strategy for maximizing the annual gift tax exclusion without exceeding the $17,000 limit. Remember that each spouse has their own exclusion amount, so a married couple can give up to $34,000 to a single noncharitable recipient this year, with no limits on the number of such recipients. Keep in mind that annual gifts exceeding that amount will be applied to the lifetime exclusion.

Use Tactics That Work with High Interest Rates

Right now interest rates have gone up as well as inflation, which isn’t always the case. Estate planning strategies that can be effective in a high interest rate environment include:

  • Backdoor Roth IRA (individual retirement account)
  • Swapping low-basis assets for high-basis assets
  • Qualified personal residence trust
  • Charitable remainder annuity trust

Take Advantage of Higher Exemption Amounts While You Can

While we might hope that Congress will extend increases to the exclusion amounts, or make them permanent, hope is not a plan. Before the doubled exemption amounts revert to $5 million (adjusted for inflation) at the end of 2025, talk to your estate planning attorney to take advantage of the higher amounts while they are still in place. Examples of strategies that can help include:

  • Spousal lifetime access trust
  • Gifting trust
  • Completed-gift asset protection trust

Use Valuation Discounts Strategically

How can valuation discounts serve as a useful estate planning strategy? Valuation discounts reduce the gift tax value of an asset by reducing its value on the open market. Examples of the most common valuation discounts include discounts for lack of control, lack of marketability, and minority share ownership.

To illustrate how this works, consider a limited liability company (LLC) worth $200 million. The owner can restrict the type of owners who hold a share of the business to a limited group. The majority share owner then gives a gift of 1 percent of the company to a recipient. The holder of that minority share has no real control over the company and can only transfer that share to a limited group. Thus, for gift tax purposes, the share is worth less than $2 million, and the minority shareholder pays taxes on a lower value. With thoughtful layered discount strategies, it can be possible to discount a gift by almost 60 percent.

Estate Planning Expertise

To stay current on the most effective methods of avoiding unnecessary gift and estate taxes, you need specialists experienced in estate and tax planning. Bridge Law LLP has an extensive track record of success in protecting our clients’ assets and devising effective individualized strategies to fit their unique circumstances. To find out more about how we can help with your 2023 tax strategy, contact us here.

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