The federal gift and estate tax benefits from the Tax Cuts and Jobs Act (TCJA) are still in effect. However, many provisions will sunset at the end of 2025, according to a recent article “Trust and estate planning strategies” from Crain’s New York Business.
The most important aspect for estate planning was the doubling of the estate, gift and generation-skipping transfer tax exemptions. Adjusted for inflation, the current federal estate, gift and GST exclusion is $12.92 million in 2023. This is more than double the pre-TCJA amount, which will return in 2026, unless Congress makes any changes.
You may not have a $12.92 million federal estate, but Massachusetts plays by different rules. The current Massachusetts exclusion is only $1 million.
While these levels are in effect, there are strategies to consider.
- Maximize gifting up to the 2023 annual exclusion of $17,000 per taxpayer, or $34,000 for married couples.
- Depending on the value of the entire estate, consider strategies to keep it below the current exemption. If the estate is less than the exemption amount, no estate tax will need to be paid.
- Plan charitable giving, including charitable IRA rollovers to make the most of the deduction on 2023 income tax returns. Qualified charitable distributions made directly from an IRA could be used to satisfy Required Minimum Distributions (RMDs) and exclude them from taxable income.
- Set up 529 Plan accounts for children and/or grandchildren and consider making five years of annual exclusion gifts. Take into account any gifts made during the year to children and/or grandchildren when doing this.
- Submit tuition or any non-reimbursable medical expenses directly to the school or medical provider to avoid having these amounts count towards the annual or lifetime gift tax exemption.
- Discuss the use of a Grantor Retained Annuity Trust (GRAT), an irrevocable trust created for a certain period of time. Assets are placed in the trust and an annuity is paid out every year. When the trust expires and the last annuity payment is made, assets pass to beneficiaries outright or remain in a trust for beneficiaries.
- Ask estate planning attorney John A. Laine if a Qualified Personal Residence Trust is a good fit for you. This is an irrevocable trust allowing homeowners to transfer their home at a significantly discounted rate.
- Explore intrafamily lending, which is used to transfer partial earnings to family members without lowering the lifetime estate tax exemption or triggering gift taxes.
- Re-evaluate insurance coverage, which can provide opportunities to defer or avoid income taxes, or both, and provide assets to pay estate taxes or replace assets used to pay estate taxes.
Not all of these steps will be appropriate for everyone. However, understanding the options and discussing with your estate planning attorney will ensure that you are using the most effective strategies to achieve wealth preservation.
Reference: Crain’s New York Business (Feb. 13, 2023) “Trust and estate planning strategies”
