There’s big news from the IRS for people who use gifting as part of their estate planning. 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. Suppose you’ve already maxed out on non-taxable gifts. In that case, 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, sibling, niece or nephew or anyone to whom you’re feeling generous.
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 on 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 the $12.92 million exemption is not forever. Under the 2017 Tax Cuts and Jobs Act, the lifetime exemption will sunset at the start of 2026, and the decrease will be more than half its current value.
Whether the estate and gift tax exemption will 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, inheritance taxes, or both. These exemptions can make a big difference in estate tax liabilities for wealthy families.
Reference: Forbes (Oct. 18, 2022) “Lifetime Estate and Gift Tax Exemption Will Hit $12.92 Million in 2023.”
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