End of Year Estate Planning Overview

Can you believe the end of 2022 is almost here? As we approach the holiday season, it’s time to reexamine the federal gift and estate tax landscape. For some of you, it may be a great time to have your current estate plan reviewed. For others, additional estate planning strategies may be needed to help you avoid a potentially large estate tax bill.

2022 Facts and Figures

1.     Lifetime Gift and Estate Tax Exemption Amount: $12.06mm ($24.12mm for married couples)

Current federal law provides that the first $12.06mm you give away during your lifetime, or own at death, is exempt from federal gift and estate tax. If you are married, this $12.06mm exemption amount may be combined with your spouse’s exemption to give you, collectively, an exemption amount of $24.12mm. Every dollar gifted, or owned at death, in excess of the exemption is taxed at 40%.

2.     Annual Gift Tax Exclusion Amount: $16,000/individual/beneficiary ($32,000/married couple/beneficiary)

Federal law also allows you to make certain gifts each year without having to report those gifts to the IRS or use part of our lifetime gift and estate tax exemption. This amount, called the annual gift tax exclusion amount, is currently $16,000.00/individual/beneficiary, or $32,000.00/married couple/beneficiary. Annual exclusion gifts are not limited to family members.  

One common misconception about gift tax is that any amount in excess of the annual gift tax exclusion amount immediately triggers tax liability. However, any gifts over the annual gift tax exclusion amount simply reduce your lifetime gift and estate tax exemption amount. In other words, no tax liability should be due unless you gift more than $12.06mm in 2022.

2023 Facts and Figures

We generally view inflation as a bad thing for our economy. However, high inflation rates provide us with beneficial increases in both the federal lifetime gift and estate tax exemption amount and the annual gift tax exclusion amount. These benefits are reflected in the 2023 exemption and exclusion amounts recently published by the IRS.

1.     Lifetime Gift and Estate Tax Exemption Amount: $12.92mm ($25.84mm for married couples)

High inflation in 2022 has resulted in a very large increase in the lifetime gift and estate tax exemption amount for 2023. Based on current inflation forecasts, we can plan to see another large increase in 2024, unless Congress passes new tax legislation after mid-term elections (which seems unlikely for now). For 2023, we will see a $860,000 increase in the amount that can be gifted during life, or owned at death, without triggering estate tax liability.

2.     Annual Gift Tax Exclusion Amount: $17,000/donor/donee ($34,000/married couple/donee)

High inflation rates in 2022 also increased the annual gift tax exclusion amount. For 2023, individuals can gift $17,000.00 to as many individuals as desired, and this amount can be doubled to $34,000.00 if spouses elect to make joint gifts. Again, any gifts in excess of the annual gift tax exclusion amount will reduce the lifetime gift and estate tax exemption amount—gifting over the annual threshold will generally not trigger tax liability.

Seizing Opportunities

The federal lifetime gift and estate tax exemption amount is at an all-time high (with the exception of one year). However, this historically high exemption amount is set to be cut in half at the end of 2025, when President Trump’s tax plan “sunsets”. Until then, there is a window of opportunity for those of you in the $10mm-20mm net worth range. Specifically, those of you in this category should consider making large gifts, in trust, before the end of 2025. The IRS has indicated that gifts made prior to the “sunset” will not be taxed, even if the gifts are in excess of the new, lower exemption amounts, expected in 2026.

If you have already used your federal lifetime gift and estate exemption amount in prior years, you should consider “maxing out” your exemption in January of each year until the end of 2025. For example, if you maxed out your exemption in 2022 (at $12.06mm), then you can make additional gifts up to $860k in 2023 without triggering tax liability.

Let Us Help You

If the inevitable reduction in the exemption amount puts your estate in the crosshairs of federal estate tax liability, now is the time to act. A variety of gifting strategies are available to help grow and protect your legacy from being included in your taxable estate. Please contact us and we will develop recommendations specifically tailed to your unique situation.