Now is a great time to review your estate plan and make sure it correctly reflects your wishes and allows you to capitalize on wealth transfer opportunities. Consider these recommendations:
- Review your estate planning documents to confirm they are up-to-date and reflect your current situation. Changes may be warranted if you sold an asset or business, you have a new job, a child married, you became a grandparent, a marriage ended, you received an inheritance, there is a need for asset management or protection from a creditor or a future divorce, or an Executor, Trustee, or power of attorney or health care agent is no longer suitable or available for that role.
- Wealthy individuals should consider taking advantage of the historically high Federal estate and gift tax exemption by making a large gift. An individual can give a tax-free gift of up to $12,060,000 this year but, when the Federal exemption is reduced in 2025, the opportunity to give such a large tax-free amount will be lost. There are a variety of ways to make gifts we can explore with you. One popular method is an irrevocable Trust for the benefit of a spouse and/or children.
- If your assets exceed your state’s estate tax exemption (discussed below) and you are married, make sure your plan includes an estate tax exemption trust for the benefit of your spouse or children to take advantage of your state exemption. If you do not, your spouse’s estate will pay more estate tax. Further, assets should be allocated between spouses to take advantage of the estate exemption amount for whomever dies first.
- Start your estate planning early in the year to allow plenty of time to refine the plan and coordinate with financial advisors and accountants before the year-end rush.
- It is critical to make sure your account titles and retirement plan, insurance, and other beneficiary forms are current and coordinate with your plan.
- Avoid the expense and delay of probate by updating your estate plan to include a revocable Trust.
- If you own a second home in another state, it should be titled in the name of a revocable Trust to avoid probate there. In addition, that state may have an estate tax to consider. An LLC for a second home can also provide protection from renters and has estate tax advantages.
- Give appreciated stock instead of cash to satisfy your charitable giving to avoid incoming capital gains tax. Create a “donor advised fund” and take a charitable deduction, but defer distributions to charities of your choice until the need for a contribution arises. Use your annual required minimum distribution from your IRA to make gifts to a charity directly from your IRA and pay no income tax on the distribution.
Next, here are the updated gift and estate tax exemptions available to you in 2022:
- For 2022, the amount that you can transfer without incurring Federal gift or estate tax (your “Federal Exemption”) has increased to $12,060,000. Lifetime gifts and amounts transferred at death both count toward your Federal Exemption. Although proposals to reduce the Federal Exemption failed last year, a reduction of the Federal Exemption to about $6,500,000 is scheduled to occur in 2025. The Federal tax rate on amounts exceeding the Federal Exemption is 40%.
- In addition to your Federal Exemption, you can give $16,000 this year to as many people as you like. These annual gifts, as well as tuition and medical payments, do not count against your Federal Exemption.
- Depending on which state you live in, you may need to consider state estate tax in addition to Federal. For example, New York’s estate tax exemption[1] increased to $6,110,000 for 2022; New York has no gift tax (but does subject gifts made within three years of death to estate tax). Connecticut’s gift and estate tax exemption for 2022 increased to $9,100,000. Florida and New Jersey have no gift or estate tax. New Jersey does have an inheritance tax for transfers to beneficiaries other than a spouse or descendant.
[1] Note that, for New York estates, if the estate’s value exceeds the New York estate exemption by a small amount, the entire estate (not just the excess over the New York estate exemption) is taxed. This is sometimes called the New York estate tax “cliff.”
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For more information, please contact Doris Martin, Madelin Zwerling, Kristen Walsh or your usual Garfunkel Wild contact.