Estate Planning Tax Planning CI RGT Wealth Advisors

Estate planning: What a difference a year makes

One year ago, Congress stood poised to approve the Build Back Better Act, which in its initial forms would have changed the landscape of estate planning for high-net-worth individuals. Proposals in initial drafts included slashing the estate and gift tax exemptions (the amount you’re allowed to give away before paying gift or estate tax), the elimination of the versatile and efficient 'grantor trust' as a viable estate planning technique, and the elimination of the income tax step-up in basis at death.1

These proposals prompted a predictable wave of planning to a) use the exemptions while we still had them, and b) take advantage of trust techniques that might have otherwise gone away. Although relatively low on a historical basis, inflation began creeping up in 2021, while the stock market hit several all-time highs throughout the year.2

The impact of inflation

Fast forwarding to today, the Build Back Better bill never passed and was replaced by the Inflation Reduction Act, which had no provisions affecting estate planning. The market began its descent in mid-March, and inflation has soared to 40-year highs.3 Lower asset values make it easier to move assets out of the estate using gifts or sales. While low interest rates are advantageous for many estate planning techniques, a handful, like Charitable Remainder Trusts and Qualified Personal Residence Trusts, actually become more efficient as interest rates increase.

The headline news for estate planning in 2023, however, concerns inflation and how it affects the level of gift and estate tax exemptions. For many years, the actual estate tax exemption was a static number prescribed by statute. Starting in 2011, after a one-year absence, the estate tax was re-established at a level of $5 million (doubling again to $10 million in 2018), and the concept of indexing the exemption for inflation was introduced:

2011:  $5,000,000
2012:  $5,120,000
2013:  $5,250,000
2014:  $5,340,000
2015:  $5,430,000
2016:  $5,450,000
2017:  $5,490,000
2018:  $11,180,000
2019:  $11,400,000
2020:  $11,580,000
2021:  $11,700,000
2022:  $12,060,0004

Inflation adjustments have ranged from very minor (only $20k per person in 2016) to more significant in 2021 ($360k per person).5 The inflation adjustment for 2023, however, will create planning opportunities even for those who have already used all their exemptions to date. It is estimated that the 2023 adjustment will result in an additional $860,000 of exemption for an individual, or $1,720,000 for a married couple.6 For perspective, 2023's inflation adjustment for the estate tax exemption ($860,000) will be 27% larger than the entire estate tax exemption available to individuals in 2001 ($675,000).

Benefiting from the inflation adjustment

An example of the power of this level of increase may be helpful. Let's assume that a married couple (both age 55) has already used all of their exemptions through 2022. In 2023, that couple could use their newly found $1.72 million exemption in any number of ways, utilizing any number of sophisticated estate planning techniques.

However, even if they were to simply gift the $1.72 million in cash to a trust for their children, and assuming that gift was invested in assets that grow at an annual rate of 5%, then after 30 years that trust would have a value of more than $7.4 million. This would save the couple roughly $2.3 million of the estate tax (at today’s rates) simply by utilizing the one-year inflation adjustment for 2023. Of course, you could realize even more dramatic results by using more sophisticated techniques like Qualified Personal Residence Trusts, leveraged gifts and sales to grantor trusts, or other strategies that involve discounting, such as family partnerships or LLCs.

The inflation adjustment for 2023 is a reminder that for wealthy individuals, planning is a life-long process. Even if you have engaged in extensive planning in the past, the landscape is bound to change, providing new opportunities, such as next year's inflation adjustment, or new challenges, such as the scheduled reduction in the exemption at the end of 2025.7 Make sure to surround yourself with a team of financial and legal professionals that keeps you up to date regarding any changes that may impact your estate planning strategy.

 

https://www.whitehouse.gov/build-back-better/
2 https://www.forbes.com/advisor/investing/stock-market-year-in-review-2021/#:~:text=Not%20even%20the%20still%2Draging,that's%20second%20only%20to%201995
https://www.politico.com/news/2022/07/13/us-inflation-new-40-year-high-june-00045541
https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
https://www.irs.gov/newsroom/income-ranges-for-determining-ira-eligibility-change-for-2021
IRC Section 2010(c)(3)(B) adjusts the basic exemption amount pursuant to IRC Section 1(f)(3) using ‘Chained CPI’ for every 12-month period ending on August 31, as issued by the Bureau of Labor Statistics. Chained CPI can be found at https://www.bls.gov/.
See IRC Section 2010(c)(3)(C), which applies a $10 million inflation adjusted exemption amount only until December 31, 2025, where IRC Section 2010(c)(3)(A) sets the default amount at $5 million.


ABOUT THE AUTHOR

Steve Novak, JD

Steve Novak, JD

Partner, Wealth Advisor

Steve Novak serves as a Managing Director at RGT. He has spent the last twenty years advising wealthy individuals and family offices on estate, gift, and income tax planning matters. Most recently, Steve has been deeply involved in wealth education and family governance engagements.

Professionally, Steve has been recognized as one of the top attorneys in Dallas by *D Magazine from 2013 to 2018 and was also named a *Thompson Reuters “Super Lawyer” from 2014 to 2018. Steve was also named a *Texas Monthly “Rising Star” from 2006 to 2013.

Steve received his Juris Doctor degree and Bachelor of General Studies in Political Science from the University of Kansas. He has been involved in numerous professional and charitable organizations, including the Dallas Estate Planning Council, the Parkland Foundation Planned Giving Council, the SMU Planned Giving Board of Advisors, the Dallas Council on Charitable Gift Planners, and Campfire First Texas Council Board of Directors. Steve is also a frequent speaker on estate planning and charitable topics.




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