Before it’s too late and as the year winds down to an end, it is important to identify the current status of proposed legislation that could strongly impact gift and estate tax planning strategies in 2023 and beyond. Even though the Inflation Reduction Act was recently enacted into law, it did not enact a number of proposed high-profile changes that were present in the earlier Build Back Better Act legislation. Depending on the outcome of the midterms, it is possible for concepts originally incorporated in the proposed Build Back Better legislation to come back to life. Generally, that would require Democrats to increase their control in the Senate and maintain a majority in the House. If this were to happen, previously proposed changes may be reconsidered.

Some proposed legislative changes to keep an eye on are (i) a reduction in the unified credit for estate and gift taxes to revert to its 2010 level of $5 million per individual, indexed for inflation, (ii) significant estate and income tax changes to the grantor trust rules, (iii) limiting valuation discounts to assets other than “nonbusiness assets”, (iv) elimination of the favorable 75% and 100% exclusion rates for gains realized from Qualified Small Business Stock if a taxpayer’s income exceeds $400,000, (iv) state and local tax cap changes, and (v) the elimination of the backdoor Roth IRA. Should there be a “blue wave” this November, you should revisit your year-end planning strategies.

Potential Planning Opportunities to Consider in 2022:

Fortunately, for now, there remain many effective and well-established tax planning strategies available to consider since the proposed legislative changes noted above were not enacted. These strategies include, but are not limited to, the following:

  1. Planning to maximize the use of one’s $12.06 million unified credit by giving assets to irrevocable trusts up to the unified credit amount. A gift can be structured to be held in trust for many generations into the future, avoiding future gift, estate and GST taxes.

  2. You may recall that the unified credit was doubled in 2018 from $5 million to $10 million (indexed for inflation). This higher exemption amount is set to sunset at the end of 2025, and in 2026, the exemptions are expected to revert to the prior $5 million limit indexed for inflation. In addition, the IRS has provided guidance under the “anti-clawback” regulations for taxpayers to take advantage of the current rules. For example, if you gave away $12.06 million in 2022 and died in 2026, when the estate tax exemption is expected to be $6.5 million, $5.56 million would not be included in your estate. This equates to a tax savings of more than $2.2 million using the current 40 percent gift and estate tax rate.

  3. If you are married, one strategy is using one spouse’s $12.06 million before the law changes (to lock in the current exemption amount) and saving the other spouse’s exemption for a future year. This can help minimize taxes while keeping enough money in the estate for your lifetime.

  4. The ability to sell assets to an irrevocable trust in an amount greater than the $12.06 million exemption (although subject to certain limitations). This strategy can also avoid gift, estate, and GST taxes for many generations into the future.

  5. The ability to transfer certain business interests and receive discounts for lack of marketability and lack of control. This opportunity permits one to give or sell business assets at a significant discount and large tax savings.

  6. The ability to give Qualified Small Business Stock to individuals, or separate trusts for their benefit, with each gift of QSBS eligible for a separate QSBS exclusion limit. For example, if a donor gifts QSBS to separate irrevocable trusts for children, then each trust may be eligible for a separate QSB Annual gift tax exclusion.

  7. Note, the federal gift tax exclusion is $16,000 per donor, per donee (person receiving the gift from you) for 2022. The gift can include a check, a transfer of securities or a transfer of life insurance. Additionally, annual exclusion gifts do not count toward your lifetime estate and gift tax exemption, so it is effectively a use-it-or-lose-it option. Married couples can gift a total of $32,000 to each child, grandchild or anyone else using the annual exclusion.

Other Planning Considerations

  1. College Savings 529 Accounts provide gift, estate and income tax benefits. The growth on a 529 account is income tax-deferred, and funds used for “qualified higher education expenses” are income tax- and penalty-free. Depending on your residence, your state may tax deductions or credits for 529 contributions, so discuss with your tax advisor.

  2. Note, the definition of a “qualified higher education expense” has expanded to include more than just college tuition, room and board, and supplies. The definition now includes up to $10,000 for elementary or secondary schools each year, expenses for apprenticeship programs and up to $10,000 in student loan payments over the course of the account owner’s lifetime.

  3. For a parent and grandparent, a planning opportunity you may consider is the use of the “super-annual exclusion gift” which allows you to elect to treat the gift as if it is spread over the next five years of annual exclusion gifts at one time. This allows you to make a gift of $80,000 ($160,000 if you are married) into a 529 account.

  4. With the anticipated gift and estate tax unified credit reversion in 2026, you might consider moving your existing policies into an irrevocable life insurance trust (ILIT) in 2022. When a life insurance policy is gifted to an ILIT, there is a “three-year lookback rule” in which the death benefit is brought back into your gross estate. If you survive three years and one day, it is then outside the estate. If you make the gift in 2022, the three-year clock will end in 2025 while unified credit remains doubled.

  5. Charitable remainder trusts (CRTs) are back in the planning toolbox recently due to the rising interest rate environment. A CRT provides for distributions to a beneficiary during the trust term with the remainder payable to charity. The trust term can be for several years or based on the lives of two individuals. A CRT allows you to make a gift to charity while preserving an income stream personally or for any other non-charitable beneficiary. Additionally, when appreciated assets are transferred to the trust, the CRT can sell the appreciated assets without paying tax on the gains. Lastly, you can receive an immediate charitable income tax deduction. A CRT works well in a high interest rate environment (compared to a lower interest rate one) because it creates a larger upfront charitable tax deduction.

Contact your Freeman Lovell attorney if you have questions, or any of the attorneys in the firm’s Estate Planning Practice Group, including:

Jeffrey Rambach (DD) 312-929-4425; (O) 385-355-4826

Kristina Otterstrom (DD) 832-800-9326; (O) 385-355-4826

Peter Ness (DD) 603-234-1142 (O) 385-355-4826

Karissa Wilcox (O) 385-355-4826

Disclaimer: This alert is provided for information purposes. It does not contain legal advice or create an attorney-client relationship and is not intended or written to be used and may not be used by any person for the purpose of avoiding penalties that may be imposed under federal or state tax laws. The information and explanations stated in this alert are based on initial consideration of the law after its enactment and may be subject to different interpretation of the law and its meaning and effect in the future.

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