Rising inflation has led the US government to increase the estate and gift tax exclusion amounts for 2023. This is a perfect time for estate planning attorneys to talk to their clients about taking advantage of innovative strategies, while keeping an eye on larger changes that are coming at the end of 2025. Keep reading to learn the new amounts and ideas to help your clients.
New Exclusion Amounts
The estate, gift, and generation-skipping transfer tax exclusion amounts increased from $12.06 million to $12.92 million in 2023. While nobody likes inflation, one positive result is that a married couple has an additional $1.72 million in their combined exclusion amount. Keep in mind that many of the tax benefits provided by the Tax Cuts and Jobs Act will expire at the end of 2025, so the transfer tax exemption amounts will be cut in half at that time unless Congress acts.
In addition, the annual gift exclusion amount has increased from $16,000 to $17,000. This amount held steady from 2018 to 2021 before increasing by $1,000 two years in a row. Also, the allowable amount for gifts to noncitizen spouses who are not included in the total amount of taxable gifts is increasing from $164,000 to $175,000 in 2023.
Strategies to Maximize the New Amounts
Keeping track of news about the US economy is helpful to understand strategies that involve the new exemption amounts.
Employ Tactics That Work Best with High Interest Rates
Inflation and interest rates are not always high at the same time, but that is the current environment. Some of the estate planning strategies that can work well in a high interest rate environment include:
- Qualified personal residence trust
- Charitable remainder annuity trust
- Swapping low-basis assets for high-basis assets
- Back-door Roth individual retirement account
Take Advantage of the Higher Annual Gift Tax Exclusion
By making a habit of year-end gifting, your clients can stay under the $17,000 threshold as the end of each year approaches. Each spouse has their own exclusion amount, so a married couple can give up to $34,000 each to an unlimited number of noncharitable recipients. Gifts that exceed these amounts are applied to the lifetime exclusion amount, which is now $12.92 million per person for US citizens and domiciliaries.
Maximize Double Exemption Amounts While They Last
Unless Congress acts, the doubled exemption amounts will revert to $5 million (adjusted for inflation) at the end of 2025. Estate planners can advise their clients to take advantage of the higher exemption amounts over the next three years. Strategies that can help in these cases include the following:
- Gifting trust
- Spousal lifetime access trust
- Completed-gift asset protection trust
Utilize the Concept of Valuation Discounts
Another useful estate planning strategy is to take advantage of valuation discounts, which reduce the gift tax value of an asset by making it less desirable on the open market. The most common valuation discounts available to taxpayers include discounts for lack of marketability, lack of control, and minority share ownership.
For example, the owner of a limited liability company (LLC) worth $100 million can restrict the type of owners who hold a share of the business. If the majority share owner makes a gift of 1 percent of the company, the recipient of the minority share has no real control over the LLC. Since the minority shareholder can only transfer the asset to a limited group, the value of that share is worth less than $1 million for gift tax purposes, so the minority shareholder may only have to pay taxes on a value of $700,000. Sometimes, by taking advantage of layered discount strategies, a gift can be discounted by almost 60 percent.
These are just a few of the helpful strategies you can use to add value to your estate planning practice. To discover even more estate planning strategies and stay abreast of industry changes, visit our Live Education Calendar for practical and insightful webinars taught by industry leaders.
