ALERT – ESTATE PLANNING 2023 FEDERAL TAX UPDATE AND MORE

As we start the new year, this Federal Tax Update highlights estate planning-related federal tax information that may be helpful as you consider planning options for 2023. Although inflation is generally nothing to be pleased about, the IRS recently announced inflation-adjusted increases to the annual gift tax exclusion amount and the unified gift and estate tax exemption amounts for 2023.

Key Tax Concepts for 2023

• Lifetime Exclusion Increased to $12,920,000: As of January 1, 2023, the federal gift and estate tax exclusion amount, as well as the exemption from generation-skipping transfer (GST) tax, (collectively, the “lifetime exclusion amounts”) have increased to $12,920,000 (thus a combined $25,840,000 for a married couple). That is an increase of $860,000 per donor. This presents additional gifting opportunities for individuals who had previously used their full lifetime exclusion amounts. With portability, this means a combined $25.84 million exemption amount for a married couple. The combined gift and estate tax exemption is the total amount of gifts a person may make during their lifetime and at death before being on the hook for gift or estate tax.

• Lifetime Exclusion Will Decrease: However, please note that the lifetime exclusion amounts are still scheduled to decrease on January 1, 2026, to $5,000,000 adjusted for inflation unless Congress acts to prevent the decrease.  This is a “use it or lose it” scenario.  If you have sufficient assets to gift your lifetime exclusion amounts, you should consider doing so prior to 2026.

• Annual Exclusion Increased to $17,000: As of January 1, 2023, the federal gift tax annual exclusion amount has increased to $17,000 (thus a combined $34,000 for a married couple). This is an increase of $1,000 per gift recipient.  The annual exclusion is the amount an individual can gift per recipient per calendar year without using any lifetime exclusion amounts or paying any gift tax. This means you can gift this amount to as many people as you wish in 2023 without using up your gift and estate tax exemption amounts or paying gift tax. Married couples who gift-split may gift a combined $34,000 per donee in 2023 without making a taxable gift.

• Federal Tax Rates for Estates and Trusts Unchanged:

The highest federal estate tax, gift tax and GST tax rate remains at 40%.

The highest federal income tax rate for estates and non-grantor trusts is 37%.

This tax rate applies to taxable income over $14,450 earned in tax year 2023.

• Federal Estate Tax Portability Unchanged: The ability to transfer a decedent’s unused federal estate tax exclusion amount to the decedent’s surviving spouse by filing a federal estate tax return (referred to as “portability”) remains in effect for 2023. The period for a late portability election has been extended to five years after the decedent’s death.  Making this election following a married individual’s death is prudent if the surviving spouse’s estate might exceed the survivor’s available exclusion amount (considering the pending decrease in 2026).  If your spouse died within the last five years and this election was not made, you should contact us about the advisability of making it now.

• Required Minimum Distributions Changes: On December 29, 2022, the President signed into law the Secure 2.0 Act, which makes important changes related to retirement plan contributions and administration. Some of the important changes include the following: 1) increases the applicable age for starting required minimum distributions (RMDs) to 73 as of 2023 (for individuals who attain age 72 after December 31, 2022) and then to age 75 as of 2033 (for individuals who attain age 74 after December 31, 2032); 2) eliminates pre-death RMDs from Roth accounts in 401(k) and 403(b) plans after 2023; and 3) increases the amount of catch-up contributions allowed by some participants starting in 2025. Many other changes occurred as well. In addition, in 2022, new life expectancy tables, which are used for determining RMD amounts from IRAs and qualified retirement plans, went into effect. You should contact your plan administrator or financial advisor regarding how these changes impact you and how to compute your RMDs for 2023.

We encourage you to have your current estate plan reviewed regarding estate tax planning and business succession planning opportunities available in 2023. Such a review can also ensure that your estate plan continues to reflect your intentions and is up to date with your current circumstances. As a reminder, under current law, these amounts are scheduled to revert to much lower amounts after December 31, 2025 if Congress does not extend or make the current law permanent. There are a variety of planning strategies available to take advantage of these more significant exemption amounts before they are no longer available.