This year, tax day falls on April 18 because of the weekend. Don’t let these extra days go to waste, says a recent article from Investment News, “Top things for estate planners to do before Tax Day 2023.”
Now that the SECURE 2.0 Act has taken effect, there’s much to do before the April 18 deadline. Taxpayers should review their wills and trusts to confirm that their wishes are effectively stated. However, there’s more this year. Asset valuations, family circumstances and changed laws are all reasons to review these documents. While you’re preparing taxes and reviewing net worth statements is also an excellent time to review IRA Required Minimum Distributions (RMDs), and beneficiary designations and make an appointment to review your estate plan in light of current estate planning laws.
Current federal estate, gift and generation-skipping transfer tax exemptions are currently $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. This changes dramatically on January 1, 2026, when both numbers will be cut in half. Therefore, planning needs to be done well before the dates when these exemptions shrink.
Wealthy married couples may consider using the Spousal Lifetime Access Trust. This allows the couple to gift their increased exemptions before the reduction in 2026. If the trust is drafted properly, spouses will remain in a similar economic position as long as both spouses are alive and married to each other. The SLAT benefits the donor’s spouse, while also taking advantage of these high exemptions. For example, Betty creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her husband Barney will receive income and possibly principal. While Barney is still alive and married to Betty, their lifestyle remains intact.
When Barney dies, all amounts payable to Barney end and the trust assets pass to the following or remainder beneficiaries named in the document. They may receive the trust assets outright or in further trusts. For example, the assets are held in trust for Betty’s children for their lives, and Betty’s GST is allocated to the SLAT. If the trust is created in this way, the children receive income and principal during their lives, and the trust may continue for Betty’s grandchildren without being taxed in their respective estates.
The IRS has issued guidance stating that, with certain exceptions, most completed gifts made now will not be subject to a clawback if the taxpayer dies after exemptions are reduced.
Various states have their own additional estate, gift and/or inheritance taxes and exemptions. Your estate planning attorney will be able to explain what state-specific laws apply to your situation.
For families whose wealth is tied up in real estate property, assets can be titled differently to lower taxable estates. For example, transferring a home to a Qualified Personal Residence Trust can remove the asset from the taxpayer’s estate, while only a fraction of the home is counted as a gift. However, after the QPRT term, the grantor must pay rent to keep the home outside their estate.
For commercial property, contributing the property to an entity and then making gifts of partial interests in the entity may be helpful. However, the gifts of a portion of the entity may qualify for discounts for lack of control and marketability.
These are just a few steps to be taken before tax day 2023 and before the high exemption levels revert to pre-JCTA levels. Your estate planning attorney will know which steps are more effective for your family.
