Get These Estate and Tax Items Done Before It’s too Late

This year, tax day falls on April 18 because of the weekend and because the District of Columbia’s Emancipation Day holiday takes place on April 17. Don’t let these extra days go to waste, says a recent article from Investment News, “Top things for estate planners to do before Tax Day 2023.”

Now that the SECURE 2.0 Act has taken effect, there’s much to do before the April 18 deadline. However, there’s more this year. Taxpayers should review their wills and trusts to confirm that they effectively state their wishes. Asset valuations, family circumstances, and changed laws are all reasons to review these documents. While you’re preparing taxes and reviewing net worth statements is also an excellent time to review IRA Required Minimum Distributions (RMDs) and beneficiary designations and make an appointment to review your estate plan in light of current estate planning laws.

Current federal estate, gift, and generation-skipping transfer tax exemptions are currently $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. This changes dramatically on January 1, 2026, when the current law halves both numbers. Therefore, planning needs to be done well before the dates when these exemptions shrink.

Wealthy married couples may consider using the Spousal Lifetime Access Trust. This allows the couple to gift their increased exemptions before the reduction in 2026. If the trust is drafted correctly, spouses will remain in a similar economic position as long as both spouses are alive and married to each other. The SLAT benefits the donor’s spouse while also taking advantage of these high exemptions. For example, Betty creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her husband Barney will receive income and possibly principal. While Barney is still alive and married to Betty, their lifestyle remains intact.

When Barney dies, all amounts payable to Barney end, and the trust assets pass to the following or remainder beneficiaries named in the document. They may receive the trust assets outright or in other trusts. For example, a trustee holds the assets in trust for Betty’s children for their lives, and the trustee allocates Betty’s GST to the SLAT. If the trustmaker creates the trust in this way, the children receive income and principal during their lives, and the trust may continue for Betty’s grandchildren without being taxed in their respective estates.

The IRS has issued guidance stating that, with certain exceptions, most completed gifts made now will not be subject to a clawback if the taxpayer dies after exemptions are reduced.

Various states have additional estate, gift, and/or inheritance taxes and exemptions.  Your estate planning attorney will be able to explain what state-specific laws apply to your situation.

Families who have allocated their wealth mainly in real estate can title their assets differently to lower taxable estates. For example, transferring a home to a Qualified Personal Residence Trust can remove the asset from the taxpayer’s estate, while only a fraction of the home counts as a gift. However, after the QPRT term, the grantor must pay rent to keep the home outside their estate.

For commercial property, contributing the property to an entity and making gifts of a partial interest in the entity may be helpful. However, the gifts of a portion of the entity may qualify for discounts for lack of control and marketability.

These are just a few estate and tax items you could take before tax day 2023 and before the high exemption levels revert to pre-JCTA levels. Your Austin estate planning attorney will know which actions are more effective for your family. Book a call to discuss your specific circumstances.

Reference: Investment News (Feb. 27, 2023) “Top things for estate planners to do before Tax Day 2023.”