IRS Increases Gift and Estate Tax Exemption in 2023

Both figures are adjusted annually for inflation, which we know has been significant this year. In 2023, an individual can make gifts of $17,000 per person without incurring gift tax or using part of their lifetime exemption. any gift or inheritance tax on such transfers. This means that even if an individual has fully used their currently available $12.06 million exemption in 2022, they can donate an additional $860,000 in 2023 without incurring gift tax. The $12.92 million exemption will revert to the original 2011 base amount of $5 million (adjusted for inflation) on January 1, 2026, unless Congress acts.

There are a number of different planning strategies individuals can consider with this increased gifting capacity. One of the advantages of using the lifetime exemption is that any appreciation of the disposed asset is also outside the individual’s estate for estate tax purposes on death. For example, if a person gives away stock with a current value of $5 million and it grows to $8 million upon death, that additional $3 million appreciation is exempt from gift tax and on successions. The gift can be made directly to another person or, more commonly, in trust.

One type of trust that individuals commonly use to make use of their exemption is commonly referred to as a Spousal Lifetime Access Trust (also known as a “SLAT”) for the benefit of their spouse and descendants. An SLAT is a popular trust for married people because it allows the settlor (the person who contributes money or other property to a trust) to retain a collateral benefit of the irrevocable trust since their spouse is a beneficiary and assets can be distributed from the trust. to support the couple’s lifestyle. Another benefit of donating to an SLAT is that an SLAT is generally structured as a grantor trust. A grantor trust is a trust in which the grantor is responsible for reporting all income, credit and deduction items on their own personal return, rather than treating the trust as a separate taxpayer. While it may not initially seem advantageous to continue paying taxes on the assets the settlor has disposed of, by paying the income taxes on behalf of the trust, it allows the trust to grow without being diminished by the income taxes.***

Other clients may choose to donate to a number of other types of trusts created for their descendants or other beneficiaries to take full advantage of the additional exemption. A descendant trust is an irrevocable trust usually set up for the benefit of the settlor’s children, and often also their grandchildren. Unlike an SLAT, the settlor’s spouse is not a beneficiary. A descendant trust can be structured as a grantor trust or a non-grantor trust, where the trust is responsible for paying its own income taxes. The assets of the trust may be used for the intended beneficiaries for any purpose specified in the trust agreement. These types of trusts are very flexible and can be tailored to the wishes of the settlor, making them a very popular donation vehicle.

Another option an individual can consider with the increased exemption available in 2023 is life insurance. Many people use life insurance to offset any federal or state property taxes that may be owed upon their death. The federal estate tax is 40% of the value of the deceased’s assets over and above their remaining exemption and any marriage, charitable and other deductions, **** so it may be a significant financial burden. If properly structured through the use of an Irrevocable Life Insurance Trust (often referred to as an “ILIT”), proceeds from the life insurance policy cannot be included in the deceased’s estate inheritance tax purposes and can provide the necessary cash to pay inheritance tax when it is due nine months after the death of the deceased. Many married couples use a second-to-die policy because many estate plans rely on the spousal deduction to defer estate taxes until the surviving spouse dies. ***** Second-to-die policies are also generally less expensive than a single life policy because premiums are based on the joint life expectancies of both policyholders. Increasing the exemption may provide the option of purchasing a fully paid policy to offset potential property taxes, if this is an issue.

There are a number of options to consider with the increase in gift and estate tax exemption in 2023. These can be existing trusts or newly created trusts and can be structured as trusts grantors or non-grant trusts as set out above. Regardless of the estate planning goal, individuals should consider taking advantage of the increased annual gift tax exclusion and lifetime exemption to the extent they feel comfortable. to do.

By Jacqueline Denton

Associate Wealth Strategist

Advanced Planning Group

See full note on Advanced Planning – Lifetime Inflation-Adjusted Exemption: Some Planning Strategies for Using Step-Up, November 4, 2022.

* Rev. proc. 2022-38.

** Identifier. Generally more relevant when a gift is made in trust, certain conditions must be met for this gift to qualify for the annual gift tax exclusion.

*** For more information on SLATs, see Catherine McDermott, Spousal Lifetime Access Trusts (a UBS Advanced Planning Group publication).

**** Specifically, the top marginal federal estate tax rate is 40%. The federal estate tax is progressive but reaches the highest marginal rate once the taxable estate exceeds $1 million.

***** The spousal deduction is unlimited between spouses who are both US citizens. For more information on estate planning for non-US citizens, see Carrie J. Larson, Planning for Non-US Citizens (a publication of the UBS Advanced Planning Group).

Approval Code: IS2206126
Expiry date: 31/10/2023

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