Year-End Estate Planning Updates

The end of the year is a good time to review the current gift and estate tax rules and stay up to date with the minor changes coming in 2023.

Annual gift tax exclusion. This is the amount you can give to another person per calendar year without reporting it to the IRS. The annual gift tax exclusion is $16,000 in 2022 and will increase to $17,000 in 2023. This covers everything from a $500 gift card at Christmas to a $64,000 gift made in four parts (Mom gives $16,000 each to son and daughter-in-law and Dad does the same).

Any gifts more than the annual exclusion amount should be reported on a gift tax return (IRS Form 709). Your accountant can advise you on your specific situation. Keep in mind that no gift tax is actually owed on gift amounts in excess of $16,000 unless you made prior gifts during your lifetime that in total exceed the gift and estate tax exemption, which is discussed below (currently at $12.06 million). The IRS keeps track of gifts in excess of the annual gift tax exclusion and subtracts them from your estate tax exemption. The philosophy behind the law is a person is allowed to transfer a certain amount of wealth either during their lifetime, at their death, or a combination of both, and if they exceed that amount during their lifetime, they owe gift tax, and if they exceed it after their death, an estate tax will be due. The current gift and estate tax rate is 40%.

If a widow gifts her home worth $116,000 to her bachelor son by transferring it to him via a Quit Claim Deed, a gift tax return is required for the value of the gift that exceeds the annual gift tax exclusion. ($116,000 value of home – $16,000 annual gift tax exclusion = $100,000 reportable gift). Assuming the widow has not made lifetime reportable gifts over $12.06 million — no gift tax is owed. The gift tax return is essentially a for-your-information only disclosure to the IRS.

Another example of a reportable gift is a widow selling a quarter of land worth $316,000 to her son for $200,000. By selling the land for $116,000 less than it is worth, the difference between the fair market value and the sale price is considered a gift ($316,000 fair market value – $200,000 sale price = $116,000 gift). Of the $116,000 gift, the first $16,000 falls under the annual gift tax exclusion and does not have to be reported to the IRS. The remaining $100,000 must be reported to the IRS and is subtracted from the widow’s estate tax exclusion available to her at death ($12.06 million – $100,000 = $11.96 million remaining estate tax exclusion). Again, assuming the widow has not used up all of her gift/estate tax exemption already, no gift tax is owed.

A common and simple strategy many givers use is to make one-half of a gift in December and the other one-half in January in order to use two years’ worth of annual gift tax exclusions within two days (December 31st and January 1st).

Keep in mind there are other exceptions in the gift tax rules. You can gift unlimited amounts to your spouse (assuming they are a U.S. citizen). You can also pay medical expenses or educational tuition costs directly to the institution on behalf of someone else without it being deemed a gift.

Gifts to charities and certain political and civic groups are also not counted against you for gift and estate tax purposes.

As always, consult with your legal and tax advisors about your specific situation as a more robust explanation of the rules is beyond the scope of this article.

Charitable Gifts from IRAs. If you are 70.5 years or older, you can arrange for a qualified charitable distribution (QCD) to give money directly from your IRA to an eligible charity, up to $100,000. The QCD transfer is tax-free and will lower your taxable income. For this reason it is a more powerful strategy than simply taking an IRA distribution yourself, writing a personal check to a charity, reporting the IRA distribution as income and taking your usual income tax deduction. Furthermore, the QCD can be used to satisfy your required minimum distribution (RMD). Visit with your accountant and financial advisor to make sure all the required documentation is in place to properly report this type of transfer.

Gift and Estate tax exemption. The gift and estate tax exemption is $12.06 million for those who pass away in 2022 and increases to $12.92 million for those who pass away in 2023. Each year the amount is increased for inflation, but at the end of 2025, Congress may choose to increase or lower the amount. Watch for discussions of this issue in the national news in the next two or three years as the estate tax will once again take a turn in the media spotlight.

Wishing you and your loved ones a peaceful holiday season — Merry Christmas!

This article does not constitute legal advice. Each individual should consult his or her own attorney.


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