Category: Estate Tax

Tips to Reduce Size of your Taxable Estate

Tips to Reduce Size of your Taxable Estate

The current lifetime estate and gift tax exemption is set to be cut by half after 2025, unless Congress acts to extend it, which doesn’t seem likely in the current financial environment. There are tips to help reduce the size of your taxable estate, reported in a recent article “Smarter Ways To Make Estate Planning Gifts” from Forbes.

It’s generally better to give property than to give cash, especially investment property. Recipients are less likely to sell these gifts and spend the proceeds. It’s more likely that cash will be spent rather than invested for the long term. Investment property is almost always a better gift for the long term.

However, property gifts come with potential taxes. To help reduce the size of your taxable estate, make gifts of the correct properties. There are a few principals to follow.

Don’t give investment property with paper losses. The recipient of a gift of property gets the same tax basis in the property as the person making the gift. The appreciation occurring during the holding period is taxed when the gift recipient sells the property.

If the property didn’t appreciate when the owner had it, the beneficiary’s tax basis will be the lower of the owner’s basis and the current market value. When the investment lost value, the beneficiary reduces the basis to the current fair market value. The loss incurred for the owner won’t be deductible by anyone. There is no winner here. It is best for the owner to hold the loss property or sell it, so at least they can deduct the loss and gift the after-tax proceeds.

Give appreciated investment property after a price decline. This makes maximum use of the annual gift tax exclusion and minimizes the use of the giver’s lifetime estate and gift tax exemption. You can give more shares of a stock or mutual fund by making the gift when prices are lower.

Let’s say shares of a mutual fund were at $60—you could give 266.67 shares tax free under the annual gift tax exclusion ($17,000 in 2023). If the price dropped to $50, you could give 320 shares without exceeding the exclusion limit.

When the recipient holds the shares and the price recovers, they will have received more long-term wealth. The giver would not have incurred estate and gift taxes or used part of their lifetime exemption.

This is also an example of why families should consider gift giving throughout the year and not just at year’s end. An even better way: determine early in the year how much you intend to give, and then look for a good time during the year to maximize the tax-free value of the gift.

It’s good to give property most likely to appreciate in value. If the goal is to remove future appreciation from the estate, gift property you expect to appreciate. This also serves to maximize the wealth of loved ones, especially appreciated when the beneficiary is in a lower tax bracket. When the property is eventually sold, the beneficiary likely will pay capital gains taxes on the appreciation at a lower rate than the giver would. You pass on more after-tax wealth and reduce the family’s overall taxes.

Retain property if it has appreciated significantly. When it’s time to sell the property and the loved one is in the 0% capital gains tax bracket, it’s best to make a gift of the property and let them sell it. Even if the loved one is in the 10% capital gains tax bracket, this still make sense if you’re in the higher capital gains tax bracket. But there are some things to consider. If the gain pushes the recipient into a higher tax bracket and triggers higher taxes on all their income, it won’t be a welcome gift. If there’s no urgent need to sell the property, you can ensure a 0% capital gain by simply holding onto the investment.

Give income-generating assets. If you hold income-generating investments and you don’t need the income, consider giving those to family members in a lower tax bracket. This reduces taxes on the income and the recipient is also less likely to sell the asset to raise cash when it’s generating income.

Remember the Kiddie Tax. Heirs who are age 19 or under (or under 24 if they are full-time college students) are hit with their parents’ highest tax rate on investment income they earn above a certain amount, which was $2,300 in 2022. At this point, gifts of income-producing property create tax liabilities, not benefits.

These are just a few tips to help you reduce to size of your taxable estate. Work with your estate planning attorney to identify any additional tax reductions available. If you would like to learn more about tax planning, please visit our previous posts. 

Reference: Forbes (Dec. 27, 2022) “Smarter Ways To Make Estate Planning Gifts”

The Estate of The Union Podcast

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The Estate of The Union Season 2|Episode 5 - Bad Moon Rising: The Corporate Transparency Act

The Estate of The Union Season 2|Episode 5 is out now!

The Estate of The Union Season 2|Episode 5 is out now!

Happy New Year! To kick off the first episode of 2023, host Brad Wiewel, sits down to discuss the Corporate Transparency Act and how it relates to trusts.

There is a Bad Moon Rising (to quote Creedence Clearwater Revival). The bad moon is the Corporate Transparency Act which is going to REQUIRE all LLCs, corporations and Limited Partnerships to register with the federal government! The law becomes effective January 1, 2024.

This podcast focuses on some of the provisions of the new law and the consequences and penalties for failure to comply. It is a MUST LISTEN if you or someone you know or work with has an entity, because this is SERIOUS STUFF!

In the podcast we mention that we have a new service we are providing called Business Shield . It is designed to maintain entities and keep them in compliance with both state, and now federal law. Simply click on Business Shield™ to be taken to the page on our website. Please let us know if you would like to discuss Business Shield™ with us and we’ll be happy to schedule a complimentary phone consultation with one of our attorneys.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 2|Episode 5 is out now! The episode can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the link below to listen to the new installment of The Estate of The Union podcast. We hope you enjoy it.

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Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

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Preparing an estate inventory is critical

Preparing an Estate Inventory is Critical

The executor’s job includes gathering all of the assets, determining the value and ownership of real estate, securities, bank accounts and any other assets and filing a formal inventory with the probate court. Preparing an estate inventory is critical to having a smooth probate. Every state has its own rules, forms and deadline for the process, says a recent article from yahoo! Finance titled “What Do I Need to Do to Prepare an Estate Inventory for Probate,” which recommends contacting a local estate planning attorney to get it right.

The inventory is used to determine the overall value of the estate. It’s also used to determine whether the estate is solvent, when compared to any claims of creditors for taxes, mortgages, or other debts. The inventory will also be used to calculate any estate or inheritance taxes owed by the estate to the state or federal government.

What is an estate asset? Anything anyone owned at the time of their death is the short answer. This includes:

  • Real estate: houses, condos, apartments, investment properties
  • Financial accounts: checking, savings, money market accounts
  • Investments: brokerage accounts, certificates of deposits, stocks, bonds
  • Retirement accounts: 401(k)s, HSAs, traditional IRAs, Roth IRAs, pensions
  • Wages: Unpaid wages, unpaid commissions, un-exercised stock options
  • Insurance policies: life insurance or annuities
  • Vehicles: cars, trucks, motorcycles, boats
  • Business interests: any business holdings or partnerships
  • Debts/judgments: any personal loans to people or money received through court judgments

Preparing an estate inventory is critical for probate, but it may take some time. If the decedent hasn’t created an inventory and shared it with the executor, which would be the ideal situation, the executor may spend a great deal of time searching through desk drawers and filing cabinets and going through the mail for paper financial statements, if they exist.

If the estate includes real property owned in several states, this process becomes even more complex, as each state will require a separate probate process.

The court will not accept a simple list of items. For example, an inventory entry for real property will need to include the address, legal description of the property, copy of the deed and a fair market appraisal of the property by a professional appraiser.

Once all the assets are identified, the executor may need to use a state-specific inventory form for probate inventories. When completed, the executor files it with the probate court. An experienced estate planning attorney will be familiar with the process and be able to speed the process along without the learning curve needed by an inexperienced layperson.

Deadlines for filing the inventory also vary by state. Some probate judges may allow extensions, while other may not.

The executor has a fiduciary responsibility to the beneficiaries of the estate to file the inventory without delay. The executor is also responsible for paying off any debts or taxes and overseeing the distribution of any remaining assets to beneficiaries. It’s a large task, and one that will benefit from the help of an experienced estate planning attorney. If you would like to learn more about probate, please visit our previous posts. 

Reference: yahoo! finance (Dec. 3, 2022) “What Do I Need to Do to Prepare an Estate Inventory for Probate”

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Proper Asset Protection Can Avoid a Receiver

Proper Asset Protection Can Avoid a Receiver

The role of the receiver is often poorly understood. Many asset protection plans fail to address situations involving receivers. The vulnerable point of an asset protection or estate plan is where the wish to protect assets meets the desire to retain control, creating a weakness a receiver can exploit, says a recent article titled “Understanding Receivers For Collection And While Asset Protection Planning” from Forbes. Proper asset protection can avoid the costly involvement of a receiver.

The receiver has three roles: an officer of the court, an agent for the debtor’s estate (aka, creditors) and an agent of the debtor.

Receivers are appointed by the court. Most must take an oath to the effect that the receiver will follow the instructions of the court and post a bond against any misconduct. The receiver has no power to do anything until authorized by the court, which is usually part of the original order appointing the receiver.

The receiver reports to the court and usually submits monthly reports detailing their activities, expenditures and collections.

When the receiver’s work is done, they apply to the court for an order of discharge.

The receiver is an agent of the debtor’s estate, similar to how a trustee is the agent of the debtor’s bankruptcy estate. The debtor’s estate includes assets available to creditors for collection – this does not include exempt assets.

When a receiver is appointed, the receiver obtains a tax ID number for the estate and opens a bank account for the estate. As assets are liquidated, they are deposited into the account. Payment to the receiver for fees and expenses are paid from the account.

The receiver is ultimately acting for the benefit of creditors, so the receiver could be said to be an agent of creditors, although only the court may give the receiver instructions.

Third, the receiver is the agent of the debtor. As the agent of the debtor, the receiver becomes the debtor for nearly all purposes and if authorized by the court, can take any legal action the debtor could take.

For example, the receiver may execute deeds using the debtor’s name, exercise voting rights as to shares of stock or demand redemptions of stock or cancel contracts. The receiver may demand bank statements from a bank or give the U.S. Post Office instructions to forward mail to the receiver at their address. The receiver can also demand the debtors credit card statements, utility bills and anything else.

With the permission of the court, the receiver can literally take over the business, liquidate the assets of the business and cause the entity to be dissolved.

The level of intrusiveness of the receiver is such that the average debtor will make the effort to settle with their creditors to stop the receiver’s actions.

As an agent of the debtor’s estate, the receiver is likely to coordinate with the creditor. However, the receiver can only act as instructed by the court.

Asset protection needs to be done properly to avoid any involvement with a court-appointed receiver. If you would like to learn more about asset protection, please visit our previous posts. 

Reference: Forbes (Nov. 17, 2022) “Understanding Receivers For Collection And While Asset Protection Planning”

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Benefits and Drawbacks of Family Limited Partnerships

Benefits and Drawbacks of Family Limited Partnerships

Being able to transfer wealth from one generation to the next is a good thing, especially now, when a big change is coming to the federal estate tax exemption amount, says a recent article titled “The Pros and Cons of Family Limited Partnerships” from The Wall Street Journal. The are benefits and drawbacks to Family Limited Partnerships.

In 2022, estates valued at up to $12.06 million are exempt from federal taxes. However, on January 1, 2026, the exemption sinks to around $6 million, with adjustments for inflation. As a result, wealthy Americans are now re-evaluating their estate plans and many are turning to the Family Limited Partnership, or FLP, as a tax saving strategy.

An FLP can be tailored to suit every family’s needs. You don’t have to be ultra-wealthy for an FLP to make sense. An upper-middle class family owning a small business or real estate properties they’re not ready to sell could make good use of an FLP, as well as a real estate mogul owning properties in multiple states.

There are some caveats. The cost of setting up an FLP ranges from $8,000 to $15,000. However, it can go higher depending on the state of residence and the complexity of the partnership. There are annual operating costs, tax filings and appraisal fees. The IRS isn’t always fond of FLPs, because there is an institutional belief that FLPs are subject to abuse.

The FLP needs to be drafted with an experienced estate planning attorney, working in consultation with a CPA and financial advisor. This is definitely not a Do-It-Yourself project.

What makes these partnerships different from traditional limited partnerships is that all partners are family members. There are two kinds of partners: general and limited. The parents or grandparents are usually the general partners. They contribute the bulk of the assets, typically a small business, stock portfolio or real estate. Children are limited partners, with interests in the partnership.

The general partners control all of the investment and management decisions and bear the partnership liability, even though their ownership of assets can be as little as 1% or 2%. They make the day-to-day business decisions, including funds allocation and income distribution. The ability of the general partner to maintain control of the transferred assets is one of the FLP’s biggest advantage. The FLP reduces the taxable estate, while maintaining control of the assets.

Once the entity is created, assets can be transferred to the FLP immediately or over time, depending on the family’s plan. The overall goal is to get as much of the property out of the general partners’ taxable estate as possible. Assets in the FLP are divided and gifted to limited partners, although this is often a gift to a trust for the limited partners, who are the general partners’ descendants. Placing the assets in a trust adds another layer of protection, since the gift remains outside of the limited partner’s taxable estate as well.

To avoid a challenge by the IRS, the partnership must be conducted as a business entity. Meetings need to be scheduled regularly, with formal meeting minutes recorded properly. General partners are to be compensated for their services, and limited partners must pay taxes on their share of income from the partnership. The involvement of professionals in the FLP is needed to be sure the FLP remains compliant with IRS rules.

An alternative is to create a Family Limited Liability Company instead of a Family Limited Partnership. These can be created to operate much like an FLP, while also protecting partners from liability.

Partnerships are not for everyone. Your estate planning attorney will advise regarding the benefits and drawbacks of Family Limited Partnerships, and whether an FLP or an FLLC makes more sense for your family. If you would like to learn more about family limited partnerships, please visit our previous posts. 

Reference: The Wall Street Journal (Dec. 3, 2022) “The Pros and Cons of Family Limited Partnerships”

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Unified Tax Credit is Central to Estate Planning

Unified Tax Credit is Central to Estate Planning

Most people know they pay taxes on earnings and when money grows. However, there are also taxes when money or other assets are given away or passed to another after death. The unified tax credit is central to estate planning, says a recent article titled “What Are The Unified Credit’s Gift Tax Exclusions?” from yahoo!.

First, what is the Unified Tax Credit? Sometimes called the “unified transfer tax,” the unified tax credit combines two separate lifetime tax exemptions. The first is the gift tax exclusion, which concerns assets given to other individuals during your lifetime. The other is the estate tax exemption, which is the value of an estate not subject to taxes when it is inherited. Your estate or heirs will only pay taxes on the portion of assets exceeding this threshold.

The unified tax credit is an exemption applied both to taxable gifts given during your lifetime and the estate you plan to leave to others.

If you would rather gift with warm hands while living, you can pull from this unified credit and avoid paying additional taxes on monetary gifts in the year you gave them. However, if you’d rather keep your assets and distribute them after death, you can save the unified credit for after death. You can also use the unified tax credit to do a little of both.

The unified tax credit changes regularly, depending on estate and gift tax regulations. The gift and estate tax exemptions doubled in 2017, so the unified credit right now sits at $12.06 million per person in 2022. This will expire at the end of 2025, when credits will drop down to lower levels, unless new legislation passes.

Up to 2025, a married couple can give away as much as $24.12 million without having to pay additional taxes. The recipient of this generous gift would not have to pay additional taxes either. If you consider the rate of estate taxes—40%—optimizing this unified tax credit means a lot more money stays in your loved one’s pockets.

How does it work? Let’s say you have four children and each one is going to receive a taxable gift of $500,000. You can pull from your unified tax credit the same year you give these gifts. This way, there’s no need for you to pay gift taxes on the $2 million.

However, this generosity will reduce your lifetime unified credit from $12.06 million to $10.06 million. If you die and leave an estate worth $11.5 million, your heirs will need to pay estate taxes on the $1.44 million difference.

At current estate tax rates, roughly $700,000 would go to the IRS, or more, depending upon your state!

The unified tax credit doesn’t take into account or apply to annual gift exclusions. These annual exclusions allow you to give away even more money during your lifetime and it doesn’t count against your unified limit. As of 2022, taxpayers may give $16,000 per year to any individual as a tax-exempt gift. You can give $16,000 to as many people as you wish each year without being subject to gift taxes. This is a simple way to gift with warm hands without paying gift taxes or reducing the unified limit. The annual gift is per person, so if you are married, you and your spouse may give, $32,000 per year to as many people as you want and the gift is excluded.

Taxable gifts exceeding the annual gift exclusion amount must be properly documented and should be done in concert with your overall estate plan. They offer great tax advantages, and perhaps more importantly, provide the giver with the joy of seeing their wealth translate into a better life for their loved ones. The unified tax credit is central to estate planning so make the time to discuss your options with your estate planning attorney. If you are interested in learning more about tax planning, please visit our previous posts. 

Reference: yahoo! (Nov. 18, 2022) “What Are The Unified Credit’s Gift Tax Exclusions?”

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Protect the Family Business for the Next Generation

Protect the Family Business for the Next Generation

The reality and finality of death is uncomfortable to think about. However, people need to plan for death, unless they want to leave their families a mess instead of a blessing. In a family-owned business, this is especially vital, according to a recent article, “All in the Family—Transition Strategies for Family Businesses” from Bloomberg Law. There are strategies you can use to protect the family business for the next generation.

The family business is often the family’s largest financial asset. The business owner typically doesn’t have much liquidity outside of the business itself. Federal estate taxes upon death need special consideration. Every person has an estate, gift, and generation-skipping transfer tax exemption of $12.06 million, although these historically high levels may revert to prior levels in 2026. The amount exceeding the exemption may be taxed at 40%, making planning critical.

Assuming an estate tax liability is created upon the death of the business owner, how will the family pay the tax? If the spouse survives the business owner, they can use the unlimited marital deduction to defer federal estate tax liabilities, until the survivor dies. If no advance planning has been done prior to the death of the first spouse to die, it would be wise to address it while the surviving spouse is still living.

Certain provisions in the tax code may mitigate or prevent the need to sell the business to raise funds to pay the estate tax. One law allows the executor to pay part or all of the estate tax due over 15 years (Section 6166), provided certain conditions are met. This may be appropriate. However, it is a weighty burden for an extended period of time. Planning in advance would be better.

Business owners with a charitable inclination could use charitable trusts or entities as part of a tax-efficient business transition plan. This includes the Charitable Remainder Trust, or CRT. If the business owner transfers equity interest in the business to a CRT before a liquidity event, no capital gains would be generated on the sale of the business, since the CRT is generally exempt from federal income tax. Income from the sale would be deferred and recognized, since the CRT made distributions to the business owner according to the terms of the trust.

At the end of the term, the CRT’s remaining assets would pass to the selected charitable remainderman, which might be a family-established and managed private foundation.

Family businesses usually appreciate over time, so owners need to plan to shift equity out of the taxable estate. One option is to use a combination of gifting and selling business interests to an intentionally defective grantor trust. Any appreciation after the date of transfer may be excluded from the taxable estate upon death for purposes of determining federal estate tax liabilities.

For some business owners, establishing their business as a family limited partnership or limited liability company makes the most sense. Over time, they may sell or gift part of the interest to the next generation, subject to the discounts available for a transfer. An appraiser will need to be hired to issue a valuation report on the transferred interests in order to claim any possible discounts after recapitalizing the ownership interest.

The ultimate disposition of the family business is one of the biggest decisions a business owner must make, and there’s only one chance to get it right. Consult with an experienced estate planning attorney and don’t procrastinate in protecting the family business for the next generation. Succession planning takes time, so the sooner the process begins, the better. If you would like to learn more about succession planning, please visit our previous posts.

Reference: Bloomberg Law (Nov. 9, 2022) “All in the Family—Transition Strategies for Family Businesses”

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The Estate of The Union Season 2|Episode 5 - Bad Moon Rising: The Corporate Transparency Act

The Estate of The Union Season 2|Episode 4 is out now!

The Estate of The Union Season 2|Episode 4 – How To Give Yourself a Charitable Gift is out now!

This is the time of the year when people feel most inclined to provide donations to organizations and charities that mean something to them. The saying goes that “Charity Begins at Home”, but sometimes you can give money to charity and bring it back home too – No Kidding!

In this episode, Brad Wiewel discusses charitable donations and how you can use “give and get” techniques to turn those donations into income and tax deductions for yourself. Just in time for the holiday season. You do not want to miss this one! These are complex estate and tax matters, requiring the guidance of an experienced estate planning attorney for optimal results. If you would like to learn more about charitable giving in your estate planning, please visit our previous posts. 

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 2|Episode 4  – How To Give Yourself a Charitable Gift can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the link below to listen to the new installment of The Estate of The Union podcast. We hope you enjoy it.

The Estate of The Union Season 2|Episode 4 – How To Give Yourself a Charitable Gift is out now!

 

Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

www.texastrustlaw.com/read-our-books

A Few Ways to Transfer Home to Your Children

A Few Ways to Transfer Home to Your Children

There are a few ways to transfer your home to your children. Kiplinger’s recent article entitled “2 Clever Ways to Gift Your Home to Your Kids” explains that the most common way to transfer a property is for the children to inherit it when the parent passes away. An outright gift of the home to their child may mean higher property taxes in states that treat the gift as a sale. It’s also possible to finance the child’s purchase of the home or sell the property at a discount, known as a bargain sale.

These last two options might appear to be good solutions because many adult children struggle to buy a home at today’s soaring prices. However, crunch the numbers first.

If you sell your home to your child for less than what it’s worth, the IRS considers the difference between the fair market value and the sale price a gift. Therefor., if you sell a $1 million house to your child for $600,000, that $400,000 discount is deemed a gift. You won’t owe federal gift tax on the $400,000 unless your total lifetime gifts exceed the federal estate and gift tax exemption of $12.06 million in 2022, However, you must still file a federal gift tax return on IRS Form 709.

Using the same example, let’s look at the federal income tax consequences. If the parents are married, bought the home years ago and have a $200,000 tax basis in it, when they sell the house at a bargain price to the child, the tax basis gets split proportionately. Here, 40% of the basis ($80,000) is allocated to the gift and 60% ($120,000) to the sale. To determine the gain or loss from the sale, the sale-allocated tax basis is subtracted from the sale proceeds.

In our illustration, the parent’s $480,000 gain ($600,000 minus $120,000) is non-taxable because of the home sale exclusion. Homeowners who owned and used their principal residence for at least two of the five years before the sale can exclude up to $250,000 of the gain ($500,000 if married) from their income.

The child isn’t taxed on the gift portion. However, unlike inherited property, gifted property doesn’t get a stepped-up tax basis. In a bargain sale, the child gets a lower tax basis in the home, in this case $680,000 ($600,000 plus $80,000). If the child were to buy the home at its full $1 million value, the child’s tax basis would be $1 million.

Another way to transfer your home to your children is to combine your bargain sale with a loan to your child, by issuing an installment note for the sale portion. This helps a child who can’t otherwise get third-party financing and allows the parents to charge lower interest rates than a lender, while generating some monthly income.

Be sure that the note is written, signed by the parents and child, includes the amounts and dates of monthly payments along with a maturity date and charges an interest rate that equals or exceeds the IRS’s set interest rate for the month in which the loan is made. Go through the legal steps of securing the note with the home, so your child can deduct interest payments made to you on Schedule A of Form 1040. You’ll have to pay tax on the interest income you receive from your child.

You can also make annual gifts by taking advantage of your annual $16,000 per person gift tax exclusion. If you do this, keep the gifts to your child separate from the note payments you get. With the annual per-person limit, you won’t have to file a gift tax return for these gifts. If you would like to learn more about managing property in your estate planning, please visit our previous posts. 

Reference: Kiplinger (Dec. 23, 2021) “2 Clever Ways to Gift Your Home to Your Kids”

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IRS Announced New Lifetime and Gift Tax Exemptions

IRS Announced New Lifetime and Gift Tax Exemptions

There’s big news from the IRS for people who use gifting as part of their estate planning. The IRS announced new lifetime and gift tax exemptions. The annual exclusion increased from $16,000 in 2022 to $17,000 in gifts in 2023, without needing to use up lifetime gift and estate tax exclusion or paying a gift tax. The article “Lifetime Estate and Gift Tax Exemption Will Hit $12.92 Million in 2023” from Forbes provides details.

The “unified credit,” aka the lifetime estate and gift tax exemption, will also jump to $12.92 million in 2023, up from $12.06 million in 2022. Couples may combine their exemption, so a wealthy couple making gifts in 2023 can pass along $25.84 million.

Here is another way to look at what this change means. If you’ve already maxed out on non-taxable gifts, you can give an extra $1.72 million to heirs in 2023, in addition to making $34,000 per couple ($17,000 x two) in annual gifts to every child, grandchild, siblings, niece or nephew or anyone you’re feeling generous towards.

In addition to making these generous $17,000 gifts, you can also pay an unlimited amount towards someone else’s tuition or medical expenses without any impact to your lifetime exemption. An important detail: the payments must be made directly to the school or the medical provider.

The estate tax is still 40%, but the $12.92 million per-person lifetime exemption is just one of many strategies used to transfer wealth. Others include the use of GRATs and other trusts to leverage the exemption. The bear market provides numerous planning opportunities.

Keep in mind that, while the IRS announced new lifetime and gift tax exemptions for 2023, the $12.92 million exemption is not forever. Under the 2017 Tax Cuts and Jobs Act, the lifetime exemption will sunset in the start of 2026, and the decrease will be more than half its current value.

Whether the estate and gift tax exemption will actually drop so dramatically depends on the politics of Congress and the White House and the budget and deficit pressures of the year. An early version of the Build Back Better proposal would have cut the exemption in half but did not win enough votes to pass.

Another reason to make these lifetime gifts sooner rather than later? As of 2022, seventeen states and the District of Columbia still have state estate taxes and/or inheritance taxes. For wealthy families, these exemptions can make a big difference in estate tax liabilities. If you would like to learn more about tax exemptions in your estate planning, please visit our previous posts. 

Reference: Forbes (Oct. 18, 2022) “Lifetime Estate and Gift Tax Exemption Will Hit $12.92 Million in 2023”

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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