A critical step in achieving one’s financial aspirations should include implementing strategic tax planning opportunities to decrease their taxable estate. The federal tax rate applied to wealth transfers upon death or made through lifetime gifts is 40%. At such a high rate, this can significantly decrease the number of assets and legacy one can leave for future generations. Accordingly, it is no surprise that federal wealth transfer taxes (gift, estate, and generation-skipping transfer taxes) profoundly influence day-to-day estate planning for wealthy clients.
Fortunately, each taxpayer has a coupon that shelters some of their transferred assets from federal wealth transfer taxes. This coupon is known as the unified credit or lifetime exemption amount.
In 2012, The American Taxpayer Relief Act (ATRA) permanently set this exemption amount at $5 million per individual, adjusted for inflation. Then, just five years later, the Tax Cut and Jobs Act (TCJA) temporarily doubled this exemption amount to $10 million, adjusted for inflation. The inflation-adjusted exemption amount for 2022 is $12.06 million. Total wealth transfers upon death or throughout one’s life that are less than or equal to this exemption amount are free from federal wealth transfer taxes. In 2021, the Biden administration’s Build Back Better Act (BBBA) included proposals to decrease the exemption amount back to ATRA’s $5 million per person, starting in 2022. This resulted in a rush of clients engaging in wealth transfer transactions to take advantage of the high exemption amount available in 2021. Ultimately, these proposals lacked support from Senators Kyrsten Sinema and Joe Manchin and were removed from the BBBA.
The IRS just announced that the inflation-adjusted exemption amount for 2023 will be $12.92 million per person, an increase of $860K (a total of $1.72M for married couples) from the 2022 amount. This is welcome news for those individuals or families who may now have additional planning opportunities to transfer wealth and shelter assets from estate taxes.
It is important to note that the increased exemption amount set by the TCJA is temporary and is set to sunset at the end of 2025. Starting in 2026, the exemption amount will revert to the ATRA amount of $5 million per person, adjusted for inflation. Although the urgency we felt in 2021 has dissipated, it’s important to take advantage of the exemption before it’s too late. Many individuals or families who do not currently have a taxable estate should still consider gift planning as the 2026 sunset may result in them having a taxable estate.
For those individuals or families hovering around the exemption amount that worry that major gifting would limit their cash flow, they can use a completed gift Nevada Asset Protection Trust (NAPT) in which they can utilize the exemption amount while still having access to the funds. Other planning strategies are still being used to maximize the application of the exemption. These strategies include valuation discounting for lack of control and marketability, sales to Intentionally Defective Grantor Trusts (IDGT), and Grantor Retained Annuity Trusts (GRAT).
Call us today to discuss available gifting options to ensure you are maximizing the estate and gift tax exemption and ultimately leaving more to your beneficiaries.