As we move into the New Year, it is a good time to re-visit your estate and gift planning. With the market down and inflation and interest rates rising, there are several ideas that you may want to consider.
Using Annual Exclusion Gifts. The gift tax annual exclusion allows you to transfer cash or other assets to as many individuals as you choose without a gift or estate tax cost. From 2018 through 2021, the gift tax annual exclusion amount held steady at $15,000 per individual. In 2022, the amount increased to $16,000 and, due to increased inflation, increases again to $17,000 for 2023.
A married couple can give $32,000 in 2022 and $34,000 in 2023 to any one individual. However, if the gift is from only one spouse, a gift tax return may be required.
It can be a good practice to make your annual exclusion gifts early in the year to move more appreciation and income to your beneficiaries and ensure they are completed while you are alive and well.
You may also consider gifting appreciated property to individuals that are in the zero capital gain brackets so that they can sell the asset without a tax cost. The tax rate on capital gains is zero for single individuals with less than $40,400 of taxable income and married couples with less than $80,800 of income.
It also can be beneficial to use gifts to fund ROTH IRAs for your loved ones that are just starting out. They would need to qualify, and the limit for a ROTH IRA is $6,000 for 2022 and $6,500 for 2023 ($7,000 for 2022 and $7,500 for 2023 for qualified individuals over age 50). A ROTH IRA can grow tax free and, in most cases, distributions are tax free as well.
Utilizing the Lifetime Exemption. The federal gift and estate tax exemption is $12.06 million for 2022 and increases to $12.92 million in 2023. Under current law, this exemption is expected to be cut in half in 2026, so utilizing the historically large exemption amount over the next few years is something to consider for individuals with significant wealth.
If you have already used your lifetime exemption, the large increase in the exemption in 2023 of $860,000 will still be available to you.
If you are married and concerned about gifting away a significant amount of your wealth, consider a Spousal Lifetime Access Trust (SLAT). A SLAT allows one spouse to gift into a trust that includes the other spouse as a beneficiary. While The SLAT is out of the estate for estate tax purposes, the couple still has some access to the funds as long as the beneficiary spouse is alive.
Related Read: Spousal Lifetime Access Trust: A Tool for Creditor Protection and Estate Planning
Converting to a ROTH IRA. The stock market has had a difficult year and many portfolios are down by 15% to 20% or more. If the value of your qualified retirement plan assets has dropped over the recent downturn, it may be an ideal time to consider converting some of those assets to a ROTH IRA. You will pay income tax now but at the depressed values, and your other income may be down as well.
General Review of Financial Plan. It is also a good practice to review your overall estate and financial plan periodically. At a minimum, you may want to verify that you have accurate beneficiary designations in place for all insurance policies and retirement accounts, consider any life changes including divorces, marriages, births and deaths in the family that may change your overall estate plan and confirm that executors and successor trustees are appropriate, willing and able to act on your behalf if needed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
