Several changes present opportunities for folks looking to pass their wealth and minimize the tax burden.
First, beginning Jan. 1 of this year, people can leave up to $12,920,000 to heirs in their wills or while they are alive without paying estate tax or gift tax, so a married couple could gift $25,840,000 to individuals. This jumped almost $2 million from 2022 due to an inflation-adjusted increase. Because inflation has been so high, we experienced an unusually big increase from 2022 to 2023. Depending on how inflation performs, the amounts are expected to increase in 2024 and again in 2025. However, it’s already a feature of the law that it will roll back to roughly $7 million, or $14 million per married couple, on Jan. 1, 2026. So, for families who have been financially successful, the next couple years will be prime time to pass assets to the next generation because—even in the future—the IRS will respect the law as it stands today.
Another important change that took effect Jan. 1 is that the gift tax annual exclusion increased to $17,000, compared to $16,000 in 2022. This means that a married couple could give a child or grandchild $34,000 this year without being taxed on the gift, and the recipient does not have to report this money because it doesn’t count as income. This is an attractive way for folks to decrease what they have in their estate and increase children’s or grandchildren’s assets at a time when they need it.
We’re in a rising interest rate environment right now, and that often means charitable remainder trusts and charitable gift annuities are more attractive from a tax perspective than they are in a low interest rate environment. Anyone who considered one a few years ago may want to look at it again because the numbers will be very different today.
Also, a retirement account is always a good asset to give to a charity because family members are required to count it as income every time they take a distribution, which means it’s taxed. Charities receive the funds dollar for dollar. Gifting appreciated securities and real estate to charities can also be very tax efficient because the charity doesn’t have to pay capital gains tax on the sale. Giving the wrong assets to a charity is a common mistake, so selecting the appropriate assets is definitely something to research.
I often see the effects of someone not planning when a surviving family member, often the spouse, makes an appointment to discuss what next steps they need to take. The biggest surprise for folks who don’t have a will and have children from multiple relationships is that the state gives a large percentage of their assets to the children, not the surviving spouse.
Many people put off estate planning because they think discussing their possible death will make for a dreadful discussion. They compare it to going to the dentist. But it can actually be a relief for people to feel that they have their affairs in order, giving strategic thought to who receives things and how they receive them. And if you don’t have plans in place, the state decides for you. There isn’t a way to control who receives your assets if you don’t take action yourself.
This varies depending upon the family. Each has a different perspective on whether it’s appropriate to include their children in the discussion. Some folks are very private regarding their assets and plans for them. Others have a more intergenerational approach because they want the next generation to understand how hard they’ve worked for their assets and their expectation for them to be good custodians of what they inherit. These families spend time ensuring the next generation understands why the plan is what it is, and some allow them to have input.
Review your plan every 3-5 years because a lot changes over time: your assets, family, perspectives and the law.
Have disability documents in place in case you become incapacitated and can’t make your own financial or medical decisions.
Review your beneficiary designations for retirement and life insurance accounts every 3-5 years because the state disburses these assets according to what you direct on your beneficiary designation form, not your will or living trust agreement.