Federal Estate and Gift Tax Exemptions set to increase in 2023

Due to built-in inflation adjustments to the Federal Estate and Gift Tax Exemptions, Taxpayers will have the opportunity to transfer more assets in 2023, free from the Federal Estate and Gift Tax. Here are some quick facts you should know:

• In 2023, the Federal Estate Tax Exemption will jump to $12.92 million (up from $12.06 million in 2022), with all assets in excess of this exemption taxed at the rate of 40%.
• The Annual Gift Tax Exclusion will jump to $17,000 per person, per year (up from $16,000 per person, per year in 2022). Gifts made using the Annual Gift Tax Exclusion do not reduce the Federal Estate Tax Exemption. Gifts made in excess of the Annual Gift Tax Exclusion reduce the Federal Estate Tax Exemption, dollar for dollar.
• On January 1, 2026, absent legislative action, the Federal Estate Tax Exclusion is still set to sunset back to its pre-2018 level of $5 million, adjusted for inflation.
• Be sure to check the estate tax laws in your state. Maryland residents continue to be taxed on estates in excess of $5 million at the rate of 16%.

What should you be doing now if you are likely to have a taxable estate?

• • Annual Exclusion Gifts – if made on a consistent basis, these gifts are extremely helpful in reducing your taxable estate.
  • Larger Gifts – to utilize the heightened Federal Estate Tax Exemptions prior to January 1, 2026. Keep in mind gifts “come off the bottom” of your exemption, not the top.  Therefore, a gift of $1 million will reduce your Federal Estate Tax Exemption by $1 million whether it is at $12.92 million (or $5 million, indexed for inflation).
  • Where to Gift (In Trust or Outright) – Gifts can be made to beneficiaries outright or alternatively into an Irrevocable Trust for creditor protection, future estate tax avoidance while retaining (if desired) a beneficiary’s control and access to the funds.
  • Prepare Your Estate for Gifting in advance of the Sunset
    • Prepare Irrevocable Trusts now to receive gifted assets in the future.
    • Transfer assets into LLCs, Partnerships or other closely held entities allowing for timely gifting, potentially on a discounted basis.
  • Value of Assets – Depressed market value of assets create a good opportunity for gifting.
  • Review of Estate Plan – It is always worthwhile to review your estate planning documents to ensure that (beyond taxation) your plan continues to meet your family’s goals.

To learn more about the impact of the Federal Estate and Gift Tax Exemption on your family’s estate and to determine the need for action in advance of any sunset or for a review of your current estate plan, please contact the professionals at Bagley & Rhody, P.C.