Is Your Estate Plan Tax-Optimized?
Minimizing taxes is a common part of any estate planning strategy. Currently, it’s a relatively favorable environment for estate taxes, but tax rates can, and likely will change, which means it’s important for you to be aware of the implications changes could have. Here are several important tax issues that you may want to consider if you haven’t already.
Estate Tax Exemption
The federal estate tax exemption for 2022 is $12,060,000. This means that if your estate is less than that amount, your heirs are not subject to estate taxes. This exemption is adjusted for inflation, so it increases each year. The current exemption amount doubled under the Tax Cuts and Jobs Act (TCJA) of 2017, is set to expire in 2026. If Congress does not extend the TCJA, the estate tax exemption is set to go back to about $5,000,000 in 2026, meaning smaller estates could be subject to taxes. This is something we need to keep an eye on and plan for if it happens.
Gifting assets can be a valuable part of your estate planning because it reduces your taxable estate. The IRS allows you to give away a certain amount of assets without any gift tax or gift tax reporting. The lifetime U.S. gift and estate tax exemption are tied to the estate tax exemption, so for 2022, it is also $12,060,000, with an annual exclusion amount of $16,000 per recipient for individuals or $32,000 for married couples. Gifts of cash are not subject to income taxes for the recipient. Gifts of stock or real estate are also exempt from income taxes upon receipt, although capital gain taxes may apply when sold.
Generation-Skipping Transfer Tax Exemption is a way to pass down significant wealth to younger generations. The exemption applies to property transferred to a generation that is two or more levels below, such as a grandparent transferring to a grandchild. The transfer amount that can avoid federal estate taxation is also tied to the federal estate tax exemption and the lifetime gift tax exemption at $12,060,000 per individual.
In addition to the federal estate tax, 16 states, and Washington, D.C. have estate or inheritance taxes (Maryland has both). These state taxes kick in at lower thresholds, so knowing if your estate could be subject to these local taxes needs to be a critical part of your estate planning.
Reviewing Your Estate Plan
Estate planning should never be a “one and done” exercise. Laws, regulations, and, most importantly, personal circumstances change, and each could impact even the most well-crafted estate strategy. Reviewing your estate plan at least once every five years, as well as whenever you have a significant life event, is extremely important.
As your financial advisor, I am always available to sit down and go through your plan to help you make adjustments as needed. I’d also be happy to sit with you and your CPA to make sure your estate is designed to take advantage of the all-time high estate, gift tax, and generation-skipping transfer exemption amounts.