ESTATE TAX SAVING OPPORTUNITIES FOR 2023

This article highlights some important estate tax saving opportunities available under federal estate and gift tax laws effective for 2023. For specific advice on a particular topic, please consult with your attorney.

■  Temporary Increases in Federal Estate and Gift Tax Exemption Amount Until 2026

For individuals whose death occurs in 2023 the amount of lifetime gifts and death-time transfers that will be exempt from federal gift and estate tax is $12.92 million per individual (or for a married couple, a combined  $25.84 million). 

This exemption amount may increase in small increments for 2024 and 2025.  However, for decedents whose death occurs after 2025, the exemption amount is expected to be reduced to $5.49 million.

Of course, Congress can decide to increase or decrease the exemption amount at any time, but the political climate in Washington makes any prediction as to such an increase or decrease highly speculative. 

■  Planning Strategies Based on Current Exemption Amounts

In anticipation of a significant decrease in the exemption amount as of 2026, individuals and couples with significant wealth should consider taking steps now to take advantage of the current shelter amount.  This may prove to be a limited-time opportunity to transfer significant assets tax-free to children and grandchildren, or to trusts for their benefit. 

Planning strategies that will take advantage of the increased shelter amount  include:

●  Making gifts of interests in a limited liability company or family limited partnership to younger family members or trusts for their benefit.

• Generally, no gift tax will actually be payable as long as a donor’s total lifetime taxable gifts do not exceed $12.92 million (2023).

●  Using irrevocable life insurance trusts to own policies on a senior family member, which will allow the gifts of premium dollars to be leveraged when compared to the ultimate amount of policy proceeds.

●  Creating grantor retained-interest trusts, and grantor annuity or income trusts that will permit the transfer of assets for the benefit of children and grandchildren to be taxed at a lower valuation than the assets’ actual fair market value.

■  OPPORTUNITY TO SIMPLIFY WILLS AND TRUSTS 

In years past when the exemption amount was much lower, many married couples were advised to create wills containing a credit shelter trust for the surviving spouse, the sole purpose of which was to reduce federal estate taxes.   Now that the shelter amount has risen to almost $13 million, the need for such credit shelter trusts has been eliminated for most couples. 

Thus, this may be the perfect time for couples who have not updated their wills in several years to revise their estate plans to eliminate trusts and other limitations on the surviving spouse that were based solely on federal estate taxes.  (Of course, there may be good reasons, such as dementia or Medicaid qualification, where a trust for a spouse would continue to be indicated.)

Note on Pennsylvania Inheritance Tax

For Pennsylvania residents and others who may own real estate or tangible personal property located in Pennsylvania, the changes in federal gift and estate tax law will not affect the Pennsylvania inheritance tax, which will continue to be imposed on transfers of taxable property at death and on lifetime gifts in excess of $3,000 per donee occurring within one year of death. Unlike the federal estate tax, there is no minimum shelter amount applicable to the Pennsylvania inheritance tax. 

Federal Gift Tax Annual Exclusion Amount Is $17,000 for 2023

Federal law allows donors to exclude a certain amount of their gifts made each year to any number of donees, without having to use up their exemption amount.  The 2023 gift tax annual exclusion amount is $17,000 per donee.  (Spouses can together make gifts of up to double these amounts.) If an annual gift-giving program is implemented over several years, a significant amount of wealth can be transferred tax-free.

■ Income Taxes on Trusts and Estates

For 2023, the federal income tax rate applicable to estates and non-grantor trusts is 37% on ordinary income in excess of $14,450.  As with individuals, this rate does not include the additional 3.8% net investment income tax on passive income.

It is important to note that the federal income tax brackets for estates and non-grantor trusts are extremely compressed as compared to those for individuals.  For example, while the maximum 37% tax rate is imposed on estate and trust income in excess of $14,450, that same 37% rate is not imposed on an individual until their income currently reaches $539,901, or $647,851 for married couples. 

  Unfavorable Change to the “Kiddie Tax”

Gifts to minor children of income-producing property, such as interests in a family limited partnership or investment assets held in a PUTMA account, can spread the senior family members’ income among lower-bracket family members.  However, perceiving this as an abuse, Congress has imposed a “kiddie tax” that is meant to limit the benefit of this technique. Until recently the unearned income of a child under age 19 and a college student under age 24 was taxed at their parents’ tax rate, if the parents’ tax rate was higher than that of the child, thus negating the tax savings that could result from use of a lower tax bracket.

However, current federal law makes the “kiddie tax” even harsher by taxing the net unearned income of covered children at the rates applicable to trusts and estates, rather than those of the parents.  For parents who are not in the highest tax bracket, this change will cause the child’s unearned income over $14,450 to be taxed at 37%, which will be higher than the tax rate of the parents.  This change clearly goes well beyond the underlying purpose of the “kiddie tax.”

 529 Plans Extended to Elementary and Secondary School Tuition

Prior to 2018 the use of a 529 Account had been limited to paying for the expenses of higher education at an “eligible educational institution” that was registered with the U.S. Department of Education.  Current law has expanded this rule to permit distributions from a 529 Account to pay for a student’s tuition at an “elementary or secondary public, private, or religious school.”  However, such distributions are limited to $10,000 per student per year.  For more information on 529 Plans, see our separate article on the topic.

 Cash Contributions to Charities Made in 2023

For taxpayers who do not itemize their deductions, a deduction of $300 ($600 for married couples filing jointly) can still be claimed in 2023 for charitable donations of cash made to a qualified charitable organization.  See IRS Pub. 526 for details on the type of organizations that qualify.