Summary

A new year brings hope for positive change and new opportunities. With changes to estate and gift tax exemptions and the retirement laws, combined with the current and anticipated interest rate environment and economic forecast, 2023 promises to be an opportune time to take advantage of a number of estate planning techniques.

The Upshot

• While there is little good news about the current inflationary environment, it did bring an increase in the exemptions for federal estate, gift, and generation-skipping transfer (GST) taxes.

• President Biden signed SECURE 2.0 late last year, changing SECURE Act of 2019 retirement plan required minimum distribution (RMD) age restrictions to extend the period for accumulating tax-deferred growth.

• Several estate planning techniques are especially effective in a higher-interest-rate environment, such as qualified personal residence trusts (QPRTs) and charitable remainder trusts (CRTs).

• Current depressed valuations also present a unique tax planning opportunity for individuals.

The Bottom Line

We encourage you at this time of year to review your current estate planning documents to be sure they continue to reflect your wishes and are appropriate for your family given any changes in financial or family circumstances.

A new year brings hope for positive change and new opportunities. With changes to estate and gift tax exemptions and the retirement laws, combined with the current and anticipated interest rate environment and economic forecast, 2023 promises to be an opportune time to take advantage of a number of estate planning techniques.

CHANGES TO THE FEDERAL ESTATE AND GIFT TAX EXEMPTION

While there is little good news about the inflation we have been experiencing, it did bring an increase in the federal estate, gift, and generation-skipping transfer (GST) tax exemptions. In 2023, the federal estate tax exemption amount, as well as the exemption from GST tax, increased from $12.06 million to $12.92 million per individual (or a combined $25.84 million for a married couple). The gift tax annual exclusion amount, meaning the amount an individual can gift per recipient per calendar year without using gift tax exemption, has increased from $16,000 to $17,000 (or a combined $34,000 for a married couple that elects to split gifts) per person per year. These increases provide gifting opportunities for individuals, especially those who have previously used most or all of their exemption limit, to remove assets and future appreciation on those assets from their taxable estates. With the exemption amount set to be reduced by half (adjusted for inflation) on January 1, 2026, the window for planning for use of the increased exemption is quickly closing.

CHANGES TO RETIREMENT PLANNING

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which became effective January 1, 2020, significantly changed traditional notions of retirement and estate planning. On December 29, 2022, President Biden signed SECURE 2.0, which changed and expanded aspects of the SECURE Act.

SECURE 2.0 raises the age at which retirement plan required minimum distributions (RMDs) must start from 72 to 73, beginning in 2023. By 2033, RMDs will not need to start until an individual is 75. Roth IRAs will continue to be exempt from the RMD requirements for retirement account owners during their lifetimes. SECURE 2.0 also decreases the penalty for failing to take an RMD by half, from 50 percent to 25 percent of the RMD not taken.

These changes allow individuals who have not previously been required to start taking RMDs to further postpone RMDs and further extend the period for accumulating tax-deferred growth.

CHANGES IN ECONOMIC CLIMATE

Interest Rates Continue to Rise

Interest rates are projected to continue to rise in 2023. Fortunately, several estate planning techniques are especially successful in a higher-interest-rate environment, such as qualified personal residence trusts (QPRTs) and charitable remainder trusts (CRTs). Alternatively, other techniques are especially successful in lower-interest-rate environments, including related party loans, sales to grantor trusts, and grantor retained annuity trusts.

Hopefully, interest rates will eventually return to the historical low levels of the past decade. In the meantime, you may want to consider locking in your lower-interest-rate planning strategies before interest rates rise too high, and then shift your planning to higher-interest-rate strategies, such as the use of QPRTs and CRTs.

Decreased Asset Valuations

Current depressed valuations also present a unique tax planning opportunity for individuals. By transferring assets out of an individual’s estate at a lower value, an individual can take advantage of both the lower valuation and the current basic exemption amount before it is reduced in the future. Making such gifts or transfers will not only reduce the size of an individual’s current estate, but will also remove any future appreciation (for example, when markets improve) from the individual’s estate.

CONSIDER YOUR POTENTIAL FILING REQUIREMENTS

We also wish to remind you that if you made gifts in excess of $16,000 during the 2022 calendar year to any individual, it may be necessary or advisable for you to file a Form 709, U.S. Gift (and Generation Skipping Transfer) Tax Return, with the IRS on or before April 18, 2023. In addition to traditional gifts of cash or property, you may be required to report other transactions, even if below the $16,000 threshold, such as forgiveness of loans, additions to life insurance trusts, premium payments paid on policies of insurance held in a life insurance trust, transfers of life insurance policies to such a trust, or other transactions that shift wealth to another person. We are happy to discuss with you the federal gift or GST tax consequences of any gifts you made in 2022.

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