Mid-Atlantic Health Law TOPICS
Estate Planning Opportunities
Under the federal Tax Cuts and Jobs Act passed in 2017, the basic exclusion amount (the amount you can give away during your life or upon your death before incurring any gift, estate, or GST tax) is scheduled to decrease to $5 million (plus an inflation adjustment) beginning January 1, 2026.
Since 2021, the basic exclusion amount has increased twice. In 2022, the basic exclusion amount increased from $11.7 million to $12.06 million. In 2023, the basic exclusion amount increased by $860,000 to $12.92 million.
This means that in 2023, a married couple who has not made any prior taxable gifts has a combined $25.84 million of exemption to use. Even individuals who have used most or all of their exemption in prior years can still benefit from the additional $860,000 of exemption available this year.
Additionally, the gift tax annual exclusion (the amount you can give to an individual each year without the gift being subject to gift tax) increased for a second year in a row, from $15,000 in 2021, to $16,000 in 2022, and to $17,000 in 2023. This means that in 2023, a married couple electing to split their gifts can give $34,000 per donee (the person who receives the gift) without incurring any gift tax.
In 2023, you are still within the window of opportunity to implement a wide range of viable and effective planning techniques to take advantage of the current federal exemptions before they decrease in 2026. So, what should you do now?
A. Core Planning
Before you embark on any advanced planning, you should have your core estate planning documents in place. This includes—at a minimum—a will, financial powers of attorney (sometimes called a general power of attorney), and health care powers of attorney (sometimes called an advance directive or health care proxy).
For many people, using a revocable trust as the cornerstone of an estate plan is also recommended, especially for people who (1) own real property in more than one jurisdiction, (2) own interests in closely held businesses, (3) are planning for disability, and/or (4) are interested in reducing or eliminating their probate estate (probate is the court process by which assets of a decedent are marshalled and distributed to the beneficiaries named under the decedent’s will or, if there was no will, to the decedent’s heirs as determined under state law).
You should also ensure that the beneficiary designations in place on your retirement assets and life insurance are consistent with your overall plan.
More advanced, tax-saving strategies must be coordinated with your core estate plan, so it is important to have one in place (or to review and update your documents if it has been more than five years since your last review or update).
B. Use Exemption Now
Individuals who may be subject to estate tax—now or in 2026—should consider using as much of their increased exemption as they can before the exemption is reduced in 2026. The likelihood that the current Congress will enact tax law changes before 2026 is unclear (although it seems less likely given that Republicans control the House).
Rather than waiting to see what Congress will do (or not do), take advantage of larger exemption amounts while you still can. You should also discuss the financial implications of making large gifts with your financial advisors to ensure that you can afford to give away significant amounts of your wealth without jeopardizing your ability to support yourself now and in the future.
C. Make Gifts in Trust
The structure for gifts being made to use your federal exemption can take many shapes and forms, ranging from simple to complex. Generally speaking, gifts in trust (rather than gifts made outright to an individual) are preferred because they promote flexibility, protect gifted assets, and leverage the use of your exemption. Some possible planning techniques include the following.
Spousal Lifetime Access Trusts. Individuals who want to use their remaining exemptions but who are concerned about losing access to gifted assets should consider a Spousal Life-time Access Trust (SLAT). SLATs allow one spouse to make a gift in trust for the benefit of the other spouse and their family. The gift to the SLAT uses the donor-spouse’s exemption, but the donor-spouse retains indirect access to the trust assets through their spouse (who is a beneficiary of the trust).
Irrevocable Trusts for Children and Descendants. Individuals who want to use their remaining exemptions to benefit their children and younger generations should consider gifting assets to irrevocable trusts for the benefit of those individuals, rather than giving assets to them outright.
This approach has many advantages. Trusts can protect assets from a beneficiary’s creditors, shelter assets from estate tax upon a beneficiary’s death, and prevent imprudent use of assets by a spendthrift beneficiary, while still providing flexible distribution provisions that can address the beneficiary’s current and future needs.
Irrevocable Life Insurance Trusts. For individuals who have used some of their exemption or who are looking to preserve their exemption for other gifts, an Irrevocable Life Insurance Trust (ILIT) may be a good option. The purpose of an ILIT is to remove life insurance proceeds from the insured’s estate, thereby sheltering those proceeds from estate tax upon the insured’s death.
The bottom line is that you should ensure that you have your core estate planning in place and consider moving ahead with more advanced planning sooner rather than later, and certainly before 2026.