Estate Planning Strategies to Consider

4/27/2023 8:00:00 AM

NEWSLETTER Bell Wealth Q2 2023

Meg Martin, J.D., CEPA®, VP/Senior Wealth & Fiduciary Advisor

Changes to federal estate, gift and generation-skipping transfer taxes (collectively, “Federal transfer taxes”) made under the Tax Cuts and Jobs Act of 2017 are scheduled to end on December 31, 2025. Unless Congress passes further legislation, once the act sunsets, a taxpayer’s federal exemption amount will be cut in half.

The act immediately doubled the per person Federal transfer tax exemption from $5.49 million to $11.18 million and is set to revert to around $6.5 million, as adjusted for inflation, beginning in 2026.

The IRS has confirmed lifetime gifts made between January 1, 2018 (when the act took effect) and December 31, 2025 are exempt from the possibility of a “tax clawback” into a taxpayer’s estate, so now is a good time to reevaluate your estate plan to be sure it’s structured properly.

FOR EXAMPLE: If an individual makes a gift of $10 million in 2023 then dies in 2026, after the exemption amount has reverted, the individual’s estate will benefit from an exemption of $10 million instead of $6.5 million.

In other words, in this scenario the individual moved an additional $3.5 million out of their estate Federal transfer tax-free.

(This example assumes no state estate or other state transfer taxes. If you live in a state with a state estate, gift or inheritance tax, you likely have cause for estate planning regardless.)

What to Do if Your Estate Is Worth $10 Million or More

To take advantage of the act’s exemptions while you can, we highly recommend those with estates of at least $10 million consider transferring or gifting assets – and their future appreciation – now.

Here are three ways to efficiently transfer assets from your estate while still accomplishing your financial and wealth transfer goals:

  1. Annual gift tax exclusion
    This is the simplest and most cost-effective strategy. In 2023, the exclusion amount is $17,000 per person.
  2. Irrevocable trust
    Another option is to transfer part of your lifetime exemption into an irrevocable trust for the benefit of your heirs or other beneficiaries. In 2023, the lifetime estate, gift and generation-skipping transfer tax exemption is $12.92 million.
  3. Spousal Lifetime Access Trust
    This irrevocable trust strategy removes assets from your and your spouse’s estates while allowing your spouse some access to those assets.

While it is possible new tax legislation could be introduced before the sunset, if you opt to “wait and see,” you risk running out of time and the opportunity to put a thoughtful plan in place.

It’s important to work with a team of advisors, including your wealth, legal and tax advisors, to implement a comprehensive plan – taking your situation and the tax provisions applicable today and after the sunset into account.

Products and services offered through Bell Bank Wealth Management are: Not FDIC Insured | No Bank Guarantee | May Lose Value | Not a Deposit | Not Insured by Any Federal Government Agency

This article has been written for the general information of clients and friends of Bell Bank. It is not intended, nor may it be relied upon, as tax or legal advice with respect to any matter. This article also cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service or other taxing authority.

Bell Wealth Q2 2023 Webinizing_Martin_P3

Meg Martin, J.D., CEPA®

VP/Senior Wealth & Fiduciary Advisor