2023 in Review: Estate Planning Insights & Strategies for the New Year Ahead

For some, 2023 can be summed with two letters: AI. From the promises (“Now we are all ivy-league graduates!”) to the doomsday predictions (“Terminator is no longer science-fiction!”), 2023 has been the year of artificial intelligence. It was also the year that vinyl records exceeded the sale of CDs since 1987; Willie Nelson held a two-day music concert to celebrate his 90th birthday; and we were all graced with Barbenheimer (the truly magnificent cinematic duo of Barbie and Oppenheimer).

In the more exciting world of estate planning, 2023 did not see a great deal of changes. It has been a fairly quiet year. And so here are a few (non AI-generated) suggestions we offer for our end-of-the-year newsletter.

Review Formula Bequests

With the rise in the estate tax exemption amount of $12,920,000 in 2023 and $13,610,000 in 2024, it would behoove many to review their plans for “formula bequests” that divide their estate between marital and family trusts. In many plans, the documents provide that the exemption amount is to be funded to the family trust and anything left over is funded to the marital trust. The spouse and children from a prior marriage may be the beneficiaries of the family trust, while only the spouse can be the beneficiary of the marital trust. This means that in many plans, the entire estate may go into the family trust and nothing goes to the marital trust. This may or may not be what a couple would want to happen now with the high exemption amount.

Income Tax Basis Planning

To gift or not to gift, that is the income tax basis question. For those with estates that exceed the exclusion amount, gifting of assets can be an easy way to draw down their estate’s exposure to taxes. On the other hand, gifting appreciated assets means burdening the beneficiary with the tax bill when the asset is sold. The reason for this is because of what some call the biggest loop-hole in the tax code: the step-up in basis. Put simply, if a beneficiary inherits an asset the beneficiary gets the decedent’s date of death tax basis in the property. If, on the other hand, they receive the asset via a gift during life, they get the gifting person’s lifetime basis in the property.
There is no one-size-fits-all approach to this, and there are many strategies that clients can use to either meet their goals or ameliorate the tax exposure for themselves or their beneficiaries. Which strategies should be employed requires a detailed discussion with the client about the nature of their assets and beneficiaries, and the client’s objectives.

Changes to 529 Plans

It used to be that 529 Plans could only be used for higher education. Not so anymore. Now, qualified withdrawals of up to $10,000 can be made from 529 Plans to pay for tuition in K-12 schools. Also, recent changes to the law permit a beneficiary of 529 accounts to roll over up to $35,000 over his or her lifetime from any 529 account into a Roth IRA.

Plan to Use Increased Federal Exemption in 2024

Although the increased federal exemptions are not currently set to sunset until the end of 2025, clients should not wait until 2025 if they want to take advantage of the exemptions. 2025 will be very busy for estate planners and many of the exemption-using techniques can take months to accomplish. If you wait until mid/early-2025 you may be too far back in the queue to accomplish your goals in time. Moreover, no estate planner has a crystal ball, and laws could change prior to the end of 2025.

Some Gifting Techniques to Take Advantage of the Exemption Amount

Here are some highlights of gifting techniques clients can use in 2024 and 2025 in order to take advantage of the high exemption amount:

• SLATs: a taxpayer could create a Spousal Lifetime Access Trust (a SLAT) for the benefit of his or her spouse, and gift assets up to the exemption amount to the SLAT. Those assets would not be included in the taxpayer’s or spouse’s estate, and yet provide the spouse with access to the assets during his or her lifetime.
• 2024 Higher Exemption Amount: the exemption is expected to increase by $690,000 per individual in 2024. Therefore, those who gift assets in 2023 will have more room for gifting in 2024.
• Loan Forgiveness: consider forgiving loans to family members and thereby use some or all of the increased exemption amount.
• Allocation of GST: if a taxpayer’s plan uses GST trust planning, consider allocating more of the increased GST exemption amount to those trusts.
• Life Insurance: taxpayers may wish to review or reevaluate their life insurance coverage with their financial advisors.

Some Charitable Options

A Charitable Remainder Annuity Trust (CRAT) is typically more beneficial in high interest rate environments. A CRAT is an irrevocable trust that pays an annual payment to an individual (typically, the grantor) during the term of the trust, with the remainder passing to one or more charities. The grantor receives an income tax deduction for the value of the interest passing to charities. Because the value of the grantor’s retained interest is lower when the interest rates are high, the value of the interest passing to the charity (and therefore the income tax deduction) is higher.

Another strategy which is typically more viable in a low-interest environment is the Charitable Lead Annuity Trust (CLAT). A CLAT is an irrevocable trust that pays one or more named charities a specified annuity payment for a fixed term. At the end of the term, any remaining assets in the CLAT pass to the remainder, non-charitable beneficiaries. As with a GRAT, to the extent the assets outperform the IRS assumed rate of return, those assets can pass transfer tax free to the chosen beneficiaries. A CLAT would become more attractive when/if the interest rates fall.

Lastly, clients should be mindful of the ability to make IRA charitable rollover gifts, which allows an individual who is age 72 ½ or over to make a charitable rollover of up to $100,000 (adjusted for inflation) to a public charity without having to treat the distribution as taxable income.

All of the above techniques need to be given careful consideration. The attorneys of Strauss Attorneys encourage everyone, especially in 2024, to plan ahead and to consult qualified professionals for their estate planning goals.

To all of our clients and our trusted advisors, we wish you a Happy Holiday and Happy New Year!