The federal tax exemption and gift is $12,060,000 for 2022. This amount has increased from $11,700,000 in 2021. The exemption should increase to $12,920,000 per person in 2023. Considering the big increase, taxpayers should consider using this exemption, especially since today. The amount is expected to drop to about $6 million by 2026.

Lifetime access trust

Married taxpayers may want to make a lifetime gift to use their exemption balance but may be uncomfortable with not receiving the gifted amount. These taxpayers should consider making a gift to a separate living trust (SLAT). The taxpayer who creates the trust will include the spouse as a beneficiary. By including the spouse as a beneficiary, the grantor (donor) gives the spouse direct access to the SLAT’s assets. Although it is a gift made for gift and estate tax purposes, a SLAT is generally taxed as a grantor trust for income tax purposes, allowing the trust assets to grow. no tax for spouses and other beneficiaries. Paying income tax on a grantor trust does not provide for additional gifts, allowing the grantor to transfer additional wealth without gift or tax.

Sell ​​personal property to the Grantor Trust

  • A taxpayer can sell property to a grantor trust in exchange for a check. (Homeowners are often good candidates for this strategy.)
  • By using a grantor trust, the sale of appreciated assets will not result in income tax. In addition, the grantor will continue to pay taxes on the trust’s income, allowing the trust’s assets to grow tax-free. This strategy is ideal for assets with significant potential for appreciation. Additionally, tax payments to the grantor trust are not additional gifts.

Grantor Retained Annuity Trusts (GRATs)

  • With the market fluctuating and assets trading at depressed values, the Grantor Retained Annuity Trust (GRAT) allows taxpayers to transfer assets to the trust. The taxpayer keeps annuity interest for years and leaves the remainder to his children.
  • If the property is appreciated during the term of the trust, the appreciation is sent to the heirs without using the exemption amount during the taxpayer’s lifetime.
  • This type of trust can be structured as a non-zero GRAT; Effectively, there is no lifetime gift or estate tax exemption for gifts to a trust.
Marcum's end of 2022 tax guide

Annual Exclusion Allowance

The 2022 annual gift exclusion is $16,000. This is the amount that can be given per person each year, tax-free. In addition, the couple can choose to share gifts. Using this strategy, married taxpayers can give up to $32,000 to one person in 2022 before claiming a refund. In 2023, the annual exclusion increases to $17,000.

Annuity giving is an excellent way to reduce the value of a taxpayer’s property over time, thereby lowering the value of the estate tax. Keep in mind, if you make a gift to the trust of an amount equal to the annual exclusion (or less), you should consult with your tax advisor about whether a tax return should be filed, even if despite the gift amount falling within the annual exclusion limit. The rules for gifts to trusts are somewhat complex, and inheritance tax laws must be considered for all gifts to trusts (as well as direct gifts to people who skip generations).

65 days and fiduciary tax planning

It is unusual for tax laws to allow planning after the end of the tax year. At the fiduciary level, there is an election under the code that allows for income tax planning between the fiduciary and the beneficiary. Because of the IRC 663(b) election, also known on the street as the “65-day election,” the insurer can elect to take distributions made within the first 65 days of the year. , as if it had been done all year. advance tax year. In fact, this can effect the transfer of income from the fiduciary to the beneficiary. Beneficiaries are often in a lower income tax bracket than trusts or estates because of the tax burden on trusts and estates. The highest bracket for a trust or estate for 2023 starts at $14,450 in taxable income. Compare that to the highest bracket for single filers, which starts when taxable income exceeds $578,125.

  • This election only applies to estates and non-grantor trusts that are set up as “complex trusts.” Grantor trusts and non-grantor trusts that are “simple trusts” do not qualify. A simple trust is any trust that requires income from a fiduciary account to be distributed. A complex trust is not a simple trust. The maximum distribution amount for an election is limited to the greater of (1) net income for the fiscal year in which the election is made or (2) net income can be distributed (DNI).

Charitable Lead Trust

A unique plan for those who expect 2023 to be an unusually high year of income due to one-time events, such as the sale of a company. If you are in this position, and you have a tendency to do charity work, you should consider a special type of trust that will allow you to reduce the effective tax rate for the sale of your business (or other assets), and benefit from your favorite charity. the choice.

A donor’s charitable trust effectively complements the charitable tax deduction, which may offset other sources of income. The trust will pay an annual unitrust or annual payment to the chosen charity, and at the end of the trust term, the remaining principal can revert to you or your loved one. .

Charitable Remainder Trust

In an era of rising interest rates and inflation, there are two tax credit strategies that are becoming stronger. One such strategy is a charitable remainder trust. Taxpayers with assets with high unrealized gains (such as real estate, stocks or closely held businesses) can effectively contribute that asset to this type of trust. The trust is tax-free (tax laws may differ) and can effectively sell this property tax-deferred. The taxpayer will also receive an income tax deduction on their personal income tax in the year of the grant.

This deduction amount is part of the operation of section 7520. An increase in interest rates means an increase in section 7520. The government considers that the remaining interest is sent to charity in the world. interest rates will be higher than in a low interest rate world. As interest rates continue to rise through 2023, the tax cuts are getting stronger.

Other strategies not covered in this article can also be used such as gifts to special estate trusts and funding 529 plans (educational planning) for children and grandchildren, among other options. other about planning. Taxpayers should also consider state and local tax laws, and how they may differ from federal estate planning tax laws.

Talk to a tax expert at Marcum to discuss gift, estate and tax planning strategies that may be right for your specific facts and circumstances.

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