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"If You Fail to Plan, You Are Planning to Fail”

- Benjamin Franklin

First and foremost, we wish all of our clients and colleagues much health, joy and prosperity in 2023!

The pandemic and our experiences over the past few years have served to put us in touch with our mortality. As we move forward into this new year, it is important to prioritize our estate planning in order to maintain peace of mind.

A. Importance of Estate Planning

As difficult as it may be to contemplate, death is inevitable, and many become incapacitated. Accordingly, it is imperative that every single adult formulate an estate plan. Without an effective estate plan, individuals place themselves, their assets and their loved ones at risk and, instead, may invite unnecessary heartache, family strife and financial distress at the time of their incapacity or death.

Estate planning allows an individual to retain the greatest degree of control over their life and their assets. If an individual neglects to create a Last Will and Testament, appoint a guardian for his or her minor children, designate a person to care for their finances or execute a healthcare directive, decisions regarding the individual’s estate, their children's guardians, their finances and their medical care will be made by the government and the courts, without regard to their personal wishes. An estate plan offers peace of mind, knowing that long-term needs will be met, that assets will be safeguarded for loved ones and, most importantly, that loved ones will be protected in the event of the individual’s incapacity or death.

B. Estate Tax Planning in 2023

The estate tax planning landscape in the beginning of 2023 looks dramatically different than it did in the beginning of 2022. After having experienced an extended period of historically low interest rates and inflation, the Federal Reserve raised interest rates during the course of 2022 in an attempt to combat inflation. During the same period, the Internal Revenue Service (IRS) raised statutory interest rates used with many estate planning techniques; and most asset valuations became depressed. On the political front, while Democrats maintain control of the Executive Branch and the Senate, they lost control of the House in the midterm elections. While it is unlikely that significant legislative changes will be made to the gift, estate or generation-skipping transfer (GST) tax regime during the next two years, the current environment in 2023 is ripe for estate tax and wealth transfer planning.

1. Increase in Exemption Amount

Beginning January 1, 2023, there was an increase in the exemption amount for federal gift, estate and GST taxes. This exemption amount is the amount that an individual (or married couple) may transfer during life or at death, without incurring gift, estate and/or GST tax. Transfers in excess of the exemption amount are subject to federal gift, estate and/or GST tax at a rate of up to 40%. This exemption amount increased to $12.92 million per individual ($25.84 million per married couple) from $12.06 million per individual ($24.12 million per married couple) for 2022. Importantly, unless legislation is sooner enacted, this exemption amount will expire on December 31, 2025, resulting in a decrease to $5 million per individual ($10 million per married couple) (inflation-adjusted). Notably, individuals who do not fully utilize their increased exemptions through lifetime gifts may lose the additional exemptions after the exemption amount is decreased.

The exemption for nonresident noncitizens remains at $60,000 in the absence of an estate tax treaty.

2. Increase in Annual Exclusion Amount

The gift tax annual exclusion has also increased for 2023. For gifts to any person this year, the gift tax annual exclusion amount is $17,000 ($34,000 per married couple). For gifts to a non-citizen spouse, the gift tax annual exclusion amount is $175,000.

Note that contributions to 529 college savings plans and transfers to irrevocable life insurance trusts and other irrevocable trusts that are subject to “Crummey” powers of withdrawal count toward a donor’s total annual exclusion gifts to the donee for that year. For example, if a donor contributes $5,000 to a 529 plan for a child in 2023, the maximum remaining annual exclusion amount the donor may gift to that child for 2023 will be $12,000. Gifts in excess of that amount will constitute taxable gifts and will reduce the donor’s exemption amount. A donor may make five years of annual exclusion contributions to a 529 plan in any one year without using any lifetime exemption, but a gift tax return must be filed to report the gift (and no additional annual exclusion gifts, other than any inflation-adjusted amounts in succeeding years, will be permitted for the remaining four of those five years).

Direct payments for tuition, medical expenses and health insurance premiums in respect of a donee do not count toward the annual exclusion amount for that donee and do not reduce the donor’s exemption amount.

Trustees of insurance trusts and other applicable irrevocable trusts should ensure that Crummey notices are up to date. If a trust includes a Crummey power or withdrawal right, the Trustee should send notices to the Crummey power holders in a timely fashion. The Trustee should keep the Crummey notices with the trust records. Please contact us if you would like us to handle this process for you on behalf of the trustees.

3. Planning Suggestions

Given the foregoing, combined with current low asset values, it is advisable for wealthy individuals to consider gifting using the increased exemption amount now, before it is significantly reduced in a few years. Even if an individual has already exhausted his or her exemption, in 2023, there is an additional $860,000 per individual ($1,720,000 per married couple) available. Specifically, individuals should consider making gifts, forgiving existing intrafamily loans or allocating their GST exemption to prior transfers to which GST exemption was not previously allocated.

Individuals should also consider utilizing estate tax planning techniques that perform best in higher interest rate environments, such as qualified personal residence trusts (QPRTs) and charitable remainder trusts (CRTs). With a QPRT, a donor transfers his or her residence to a trust for the benefit of loved ones, while retaining the right to live there for a specified term of years. For gift tax purposes, the value of the gift is the value of the remainder interest calculated using a statutory interest rate. As this statutory rate increases, the value of the interest retained by the donor increases and, in turn, the value of the remainder interest decreases, thereby reducing the amount of the taxable gift. The CRT is also an attractive technique in the current higher interest rate environment. Using a charitable remainder annuity trust (CRAT), a donor transfers assets to a trust that pays an annuity to an individual for a specified period of time and then to charity following the term. The donor receives a charitable deduction equal to the value of the remainder interest passing to charity. Because the annuity is a fixed amount, as the statutory interest rate increases, the value of the remainder interest passing to charity becomes more valuable and, consequently, the amount of the charitable deduction increases.

Gifting now while most asset values are depressed is particularly attractive, allowing an individual to leverage the use of his or her exemption amounts and/or reduce gift tax exposure. Lifetime gifting is always more tax-effective than passing assets at death, due to the favorable way in which gift taxes (as opposed to estate taxes) are calculated and because all income and appreciation on assets post-gift escape gift, estate and GST tax.

4. Estate Plan Updates

Individuals with existing estate plans should continuously manage and periodically review them to ensure that they continue to function properly and meet their objectives at all times, regardless of the inevitable changes in life and the law.

Wills and revocable trusts that contain a “formula bequest” tied to the maximum amount that can be sheltered from federal estate tax should be reviewed in light of differences between the federal estate tax exemption and the state estate tax exemption. For instance, with the increased exemption amount, a formula bequest that leaves the maximum amount possible without incurring federal estate tax to a credit shelter trust or other third-party beneficiaries may result in significantly more of the estate, or even the entirety thereof, passing to the credit shelter trust or such beneficiaries and not to or for the benefit of a surviving spouse. Such an arrangement could also result in an enormous state estate tax liability that would otherwise not be imposed.

C. Conclusion

The current financial and political landscapes provide compelling reasons to engage in estate tax and wealth transfer planning. Please contact us if you wish to discuss creating an estate plan. If you already have an estate plan, please consider participating in our Client Care Program (CCP). Through the CCP, we proactively administer and update our clients’ estate plans, including preparation of Crummey notices. We keep our CCP clients informed about changes in the law that might affect them, and routinely remind them to monitor their plans with regard to major life events, through our electronic newsletter and emails. We also conduct annual meetings with our CCP clients, their families, fiduciaries, investment advisors and accountants at least once a year to ensure the estate and any trusts are being properly managed.

DISCLAIMER: We provide the information in this blog post for general information purposes only, and these materials do not constitute legal or other professional advice. We do not accept any responsibility for any loss that may arise from reliance on the information contained herein. No reader should act or refrain from acting based on information contained in this blog post without seeking advice of counsel.


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