King & Wood, P.A.

How to Help a Grieving Spouse Deal with the Social Security Administration

“There are things you learn from books and things you discover from life.”

Even those who regularly work with elderly people are surprised by the obstacles presented during the course of major life events, according to a recent article from Financial Advisor, “Working With Grieving Spouses And The Social Security Administration.”

For one such professional, the sudden loss of her grandfather meant her grandmother was without her spouse of many decades and living on her own for the first time in her life.

The author’s mother moved the grandmother into her own home and began dealing with the father’s estate and the various government agencies, including Medicare and Social Security. The Social Security Administration turned out to be more than the mother or financial professional expected.

The grandmother needed to file for Social Security survivor benefits. She had been collecting spousal benefits since age 62, and she was now 89.

Despite multiple calls and in-person visits to the local SSA office, the grandmother’s situation wasn’t resolved. Various staff members provided a great deal of inaccurate information. They even told the grandmother the funeral home had never informed the SSA of the grandfather’s passing, which was not true. There were many contradictory instructions issued, none of which made sense.

Spouses need to know what to do when their spouse dies, and they become the surviving spouse. These are admittedly grim facts to face, but as estate planning attorneys know, it is always better to be prepared before these events occur.

The surviving spouse must go to their local Social Security Administration’s office to file for Widow’s, Widower’s, or Surviving Divorced Spouse’s Benefits.

Making an appointment in advance is better than just arriving and hoping to be seen.  Appointments are not technically required, but you may risk having a long wait or having to come back if the office is busy.

The Social Security Administration has an “Express Check-In” for mobile phones to use upon arrival at the office.

There are certain documents needed for this appointment. Bring everything—if you don’t have the original, a copy will do—so you don’t need a return visit because of a missing document.

Check the IRS website for their list of what information is needed when filling a claim for surviving spouse benefits and have all the answers to the questions prepared in writing.

Bring a blank check and a recent bank statement to provide your bank routing and account numbers, so monthly deposits can be made directly into the accounts.

Remember SSA representatives are not estate planning lawyers or financial advisors. They may be trying their best, but you may receive inaccurate or contradictory information. If you are not sure of the information, reach out to your estate planning attorney.

This is an extremely emotional time for the person who has just lost a loved one. If possible, have someone with you who can advocate for you if the process becomes overwhelming.

Reference: Financial Advisor (Nov. 6, 2023) “Working With Grieving Spouses And The Social Security Administration”

How Can a Trust Be Used for Long-Term Care?

“They may wish they had applied for long-term-care insurance when they were healthy enough to pass the medical underwriting standards.”

More than a few seniors who are retired or nearing retirement lose sleep worrying over being able to afford the expense of long-term care, including nursing home care, which can cost thousands monthly. The fallback option for many Americans is Medicaid; according to a recent article, “Long-Term-Care planning using trusts,” from the Journal of Accountancy., Medicaid is a joint federal-state program requiring spending down assets.

To be eligible for long-term care through Medicaid, a person’s “countable” assets must fall below an extremely low ceiling—in some states, no more than $2,000, with some provisions in some states protecting the “well” spouse. States vary in terms of which assets are counted, with many exempting a primary residence, for example.

For many people, planning for Medicaid for long-term care may consider the use of an irrevocable trust. The basic idea is this: by transferring assets to an irrevocable trust at least five years before applying for Medicaid for long-term care, the Medicaid agency will not count those assets in determining whether Medicaid’s asset ceiling is satisfied.

If the planning is done wrong, there is a risk of not qualifying, thereby defeating the objective of creating the irrevocable trust. In addition, any tax planning may be undone, causing liquidity and other problems.

Some people plan to qualify for Medicaid even though they have asset levels as high as $2 million or more. Much of this may be the family’s primary residence, especially in locations like New York City, with its elevated real estate market. Costs at nursing homes are equally high, with nursing homes costing private-pay patients upwards of $20,000 a month, or $250,000 per year.

Timing is a key part of planning for Medicaid. Many estate planning attorneys recommend clients consider planning in their mid-to-late 60s or early 70s to move assets into a Medicaid Asset Preservation Trust, also called a Medicaid Asset Protection Trust.

This is because of Medicaid’s five-year lookback period. Most states have a five-year look-back period for both nursing home and home health care. If any transfer of countable assets has been made within the preceding five years of applying for long-term-care Medicaid, there will be a penalty period when the person or their family must pay for the care. The penalty is typically measured by the length of time the transferred assets could have paid for care, based on the average costs of the state or the region.

While there is no way to know when a person will need long-term care, statistically speaking, a person in their mid-to-late 60s or early 70s can expect to be healthy enough to satisfy the five-year lookback.

Why not simply make gifts to children during this time to become eligible for Medicaid? For one reason, there’s no way to prevent a child from spending money given to them for safekeeping. A trust will protect assets from a child’s creditors, and if the child should undergo a divorce, the assets won’t end up in the ex-spouse’s bank accounts.

Using a trust for Medicaid planning could be combined with gifts made to children or assets placed in trust for children, depending on the individual’s financial and familial circumstances.

The creation of a Medicaid Asset Preservation Trust is critical. The estate planning attorney must seek to accomplish two things: one, to say to Medicaid that the settlor, or creator of the trust, no longer owns the assets. At the same time, the IRS must see that the settlor still owns these assets and, therefore, receives a basis step-up at death.

An experienced estate planning attorney will be needed to advise you and create a Medicaid Asset Preservation Trust to meet the Medicaid and IRS requirements.

Reference: Journal of Accountancy (Oc. 9, 2023) “Long-Term-Care planning using trusts”

What Happens When the Second Parent Passes?

“However, settling the second spouse's affairs was more complex, even with advance planning. Everything from wills to banking to tax returns became more complicated.”

After doing everything right, including having an estate planning attorney prepare estate plans for her parents, a woman managed her mother’s affairs after her death in a matter of months. She expected the same when her father died, but some unexpected events occurred. A recent article from Business Insider, “I thought I was ready to wrap up my parents’ finances when they died. I was wrong,” provides some cautionary insights.

As their Power of Attorney, she managed her parents’ finances for several years before they passed, including placing most of their assets into irrevocable trusts. When her mother died, the trusts specified how the assets would be divided. A third went to the surviving spouse and a third to each of the two children. She was able to complete the transfer by phone with the investment company. She also filed her mother’s final tax returns and paid any outstanding bills.

She expected to have the same experience when her father died. However, she found that settling the second spouse’s affairs more complicated, even though she’d previously helped settle a second spouse's estate for her father-in-law.

Her father’s estate was more straightforward: he lived in an assisted living facility with few possessions. Transferring the remaining trust assets to her sister and herself took one phone call and outstanding medical bills were paid in a matter of months. However, problems arose.

Her father’s bank account wasn’t in the trust, and neither she nor her sister could access his bank account without a will. He had a trust but no will, so her sister had to go to court and be legally declared his next of kin before she could close the bank account.

Filing the final tax return was also a challenge. While getting his traditional mail was always a challenge, she had been able to find any paper documents in the past. She could not log into his online accounts, since digital assets were never addressed.

Getting a transcript from the IRS has been a long and complex process, and she’s hoping to get tax information in time to file by the tax extension deadline. As he died in 2023, she’ll have to do another set of tax returns next year.

Lessons learned:

Having a will and trust documents prepared by an estate planning attorney will make life easier. Designating an executor and/or trustee ahead of time can ease potential friction between siblings.

Gather all the paperwork. If parents are well enough and willing, gather financial paperwork, from tax records, bank and credit card information and login information to online accounts while they are still living.

Set realistic expectations. Don’t expect to complete all tasks quickly. It will take a few months and maybe longer to finalize taxes, sell property and deal with any outstanding legal or financial issues. Knowing it’s going to take time may make the process less frustrating.

Losing a parent is hard, and losing a second parent is often harder. Preparing for the estate planning aspects in advance can make a tough time a little easier.

Reference: Business Insider (Sep. 19, 2023) “I thought I was ready to wrap up my parents’ finances when they died. I was wrong.”

How can Families Minimize or Avoid Estate Taxes?

“An unprecedented rush to relinquish wealth is underway, and it isn’t just for billionaires.”

The tax cuts of 2017 temporarily doubled the amount individuals could give away without paying taxes. However, those cuts are due to expire in 2026, pushing well-to-do Americans to move fast, says a recent article from The Wall Street Journal, “The Moves Wealthy Families are Making to Skirt Estate Taxes.” According to recently published stats from the Internal Revenue Service, wealth transfer began to escalate in 2021, with more than $182.6 billion given away. Nearly $100 billion went into trusts, some of which can last for generations. A total of roughly $14.8 went to charity.

For Americans with a net worth over $10 million, it’s urgent to consider a range of moves before these tax cuts expire. There are a number of options, from simple gifts to heirs to setting up complex dynasty trusts to protect wealth over generations. The macabre alternative is to die before these cuts expire.

The $10 million figure in the Tax Cuts and Jobs Act of 2017 was indexed for inflation. For 2023, the combined gift and estate tax exemption is $12.9 million per individual, or $25.84 million per married couple. This is the amount you may give away during your life or at death tax-free.

Next year, the amount will be adjusted to $13.61 million. For 2025, it may be as high as $14 million per person. But in 2026, it will drop by half to about $7 million.

The tax cuts expire after December 31, 2025. Anyone facing an estate tax bill who hasn’t made any preparations will likely have a somber New Year's Eve.

A couple who transfers their full exemption amount of $28 million by 2025, before the law sunsets, will benefit from $5.6 million in tax savings, if they die in 2026. If they make a gift to grandchildren, skipping a generation, there would be nearly $9 million in tax savings.

These tax savings might become significantly larger over time. The appreciation is exempt from the transfer tax system when money grows in trusts. Therefore, if the trust value goes up to $100 million at the time of death, the family could save $40 million in estate taxes at the current 40% rate. This is just the federal tax savings. There are also state estate-tax savings in states like New York that continue to levy their own estate taxes.

According to UBS and Credit Suisse's global wealth report, about 1.5 million Americans have a $10 million to $50 million net worth, and nearly 125,000 worth even more.

Direct gifts of cash or securities are the simplest way to make gifts to reduce your estate. The limit on annual tax-free gifts is $17,000 for 2023. It is expected to increase to $18,000 in 2024. Anyone can make tax-free gifts of up to $17,000 to an unlimited number of people. These gifts don’t count against the larger $12.92 million combined gift and estate tax exemption. Gifts made over $17,000 require reporting to the IRS using Form 709.

Making gifts to a dynasty trust can preserve more wealth for children. The trust removes the assets from both your estate and your children’s estates, benefiting children, grandchildren, and future generations.

Trusts also offer asset protection. If assets are given to children directly, and they are sued or divorced, they could lose some or all of their assets. If gifts are made to a trust, it’s harder for a creditor to go after assets in the trust.

Do a careful analysis with your estate planning attorney before you design a gifting program. Make sure that you have enough to maintain your lifestyle. There are instances where people are so eager to gift their assets they don’t plan for the impact of inflation or volatile markets.

Reference: The Wall Street Journal (Aug. 19, 2023) “The Moves Wealthy Families are Making to Skirt Estate Taxes”

Wrong Form Leads to a Trust Forfeiting a Large Tax Refund

“The moral of this tax tale is that you have to be careful about making sure you file the right tax form to get what you want.”

The other message is to be certain that the person serving as a trustee has the knowledge to administer the trust properly or the wisdom to retain an experienced estate planning attorney who will know how to administer a trust. Not every CPA has detailed knowledge about trust taxation, reports the recent article, “Trust’s Incorrect Tax Form Forfeited large Tax Refund Claim: A Lesson For Trustees,” from Forbes.

For income tax purposes, there are several types of trusts. “Grantor trusts” are those whose income is taxed to the person, the settlor, who created the trust. The trust at issue was a grantor trust. However, when the taxpayer who created the trust died, the trust became a non-grantor trust. These are also called “complex” trusts. The income is not reported by the person creating the trust. Complex trusts usually pay their own income taxes. The beneficiaries receiving distributions then report the income for tax purposes included in the income received from the trust. This is referred to as the trust’s Distributable Net Income or “DNI.”

In this case, the trust is the remainder trust after the termination of a Qualified Personal Residence Trust or “QPRT.” This is a trust used to transfer a valuable house from the taxpayer’s estate to descendants or to a trust for them at a discount from the trust’s current value.

The trust had income to report for income tax purposes, which will be done on Form 1041, U.S. Income Tax Return for Estates and Trusts. The trust felt it was entitled to a refund of some of the taxes it paid, so it filed for a refund. Refund claims are supposed to be filed by amending the trust income tax return, but the trust filed Form 843, a form to claim a refund. The wrong form led the Court to determine that the trust failed to take appropriate action, and the refund was lost. The trust’s filing did put the IRS on notice that the claim was the wrong action.

The IRS said the taxpayer’s filing of Form 843 was insufficient as a formal claim because an amended Form 1041 is the proper form. The Court found that the IRS is authorized to demand information in a particular form and to insist that the form is observed. The instructions on Form 853 advise that the form is for a refund of taxes other than income tax, while the instructions on Form 1041 indicate that it must be used to claim a refund.

What happened in this case? Someone managing the trust didn’t know enough about trust taxation. The family may not have had regular meetings with their estate and trust attorney who created the trust. The deceased taxpayer in this case was a judge, and the trustee was the son of the judge. The taxpayer died in 2015, and the house was sold for $1.8 million the next year. The IRS demanded $930,127 in taxes, penalties, and interest from the Trust. The Trust paid that amount assessed on September 24, 2021. The court opinion was handed down on August 7, 2023. The amount of costs in accounting and legal fees must have been enormous.

This is an excellent example of why families need to have regular, ongoing meetings with their estate planning attorneys and tax advisors to be sure everyone is on the same page. Annual reviews and an estate planning attorney focusing on trust taxation could have saved this family money, time, and the stress of an unresolved IRS issue.

Reference: Forbes (Aug. 19, 2023) “Trust’s Incorrect Tax Form Forfeited large Tax Refund Claim: A Lesson For Trustees”

How Does the IRS Rule on Inherited IRAs Work?

“Before the original SECURE Act, IRA owners who died were able to leave their accounts to their children, grandkids, or other non-spouse individual beneficiaries, and heirs could stretch required minimum distributions (RMDs) over their own lifetimes, thus allowing the funds in the accounts to grow tax-free for decades.”

Before December 2019, when the SECURE Act became law, inherited IRAs were powerful means of passing along wealth. However, Congress saw this as a loophole and ended it with the 10-year clean-out rule. IRA rules are more complicated now, according to the article from Kiplinger, “IRS 10-Year Rule for Inherited IRAs: Kiplinger Tax Letter.”

There are exceptions to the clean-out rule for beneficiaries who are surviving spouses or minor children of the account owner or beneficiaries who are chronically ill, disabled, or not more than 10 years younger than the deceased IRA owner. For minor children, the exception applies until they reach the age of 21. Then they must empty the account within 10 years.

Unlike other beneficiaries, a surviving spouse may take an inherited IRA as their own. The old rules also apply to people who inherited IRAs before 2020. They can continue to take advantage of the IRA stretch strategy.

For everyone else, the 10-year rule has led to much confusion. Do withdrawals have to be equal amounts every year for 10 years, or can different amounts be taken out at different times during the 10 years? The IRS interpretation originally led many professionals to think annual payments weren’t required and an heir could wait 10 years, then take all the money out in one lump sum.

Further confusion was created in March 2022 when the IRS issued proposed rules based on whether or not the original IRA owner died before or after their first beginning date for taking Required Minimum Distributions. If they died before taking their first RMD, beneficiaries needn’t take annual distributions but could wait until the last year or skip years as long as the IRA was depleted in 10 years. Estate planning attorneys and retirement professionals were fine with this provision.

What came next surprised them. If the IRA owner died after the start dates, annual RMDs must be paid to the beneficiary in years one through nine, with the account depleted in year 10. The beneficiary would calculate annual RMDs based on their own life expectancy. The younger the beneficiary, the smaller the RMD.

The latest IRS proposal on the 10-year clean-out rule still needs to be finalized. Practitioners want the ten-year rule to apply consistently, whether or not the IRA owner dies before or after the RMD beginning date.

There’s some relief. In October 2022, the IRS said beneficiaries of IRAs inherited after 2019, for which the decedent owner was already subject to RMDs, won’t be penalized for taking distributions in 2021 or 2022. The IRS has just extended that relief for such beneficiaries to 2023.

Confused about your own inherited IRA situation? Speak with an experienced estate planning attorney to ensure that you manage your inherited IRA per the latest IRS rules.

Reference: Kiplinger (July 30, 2023) “IRS 10-Year Rule for Inherited IRAs: Kiplinger Tax Letter”

IRS Changes Rule on Inheritance Taxes

“The agency has curbed the tax break on a particular kind of trust that is often used to minimize capital gains taxes.”

The IRS has changed the rules regarding taxes on inheritances, curbing the tax break on a particular kind of trust often used to minimize estate taxes. According to the article “IRS quietly changes rule on how your children’s inheritance is taxed” from The Daily Mail, the agency has clarified how irrevocable trusts are taxed.

Before Revenue Ruling 2023-2, it was unclear what the tax policies were around assets passing to beneficiaries through an irrevocable trust. However, the ruling has confirmed that these trusts will now be subject to capital gains tax, significantly impacting estate planning.

Assets distributed during a person’s lifetime are typically subject to capital gains taxes on the increase in value of the asset over time. The tax is determined largely by the difference between how much the asset was worth when it was purchased and the value at the time it was transferred.

The exception to this rule has been when assets are passed to beneficiaries at the time of an individual’s death. The owner's death gives the recipients a “step-up in basis,” so they inherit the asset as if it had been purchased at the current value rather than when it was purchased. This eliminates any capital gains taxes.

Before the new ruling, transfers from irrevocable trusts generally received this tax break. The ruling now states that any property held in an irrevocable trust not included in the taxable estate at death will no longer receive a step-up basis.

This new rule must be considered to avoid substantial costs to heirs.

Let’s say a couple purchased a home in 1975 for $100,000, and the home is now worth $250,000. If they want to sell the home, the couple will owe capital gains on the $150,000 increase in value. Before the ruling, if they transferred their home into an irrevocable trust, the trust could sell the home from a cost basis of $250,000, and there would be no capital gains due if the proceeds were distributed to their children.

The ruling doesn’t mean trusts are no longer useful. However, planning needs to be more careful, with the help of an experienced estate planning attorney.

It is now critical to be sure any trust included in the taxable estate at death uses correct wording, so the value of the assets is included in the taxable estate.

Most families will not yet find themselves subject to federal estate tax, even if the value of their home is included because the current federal estate tax exemption is $12.92 per individual. However, in 2026 the estate tax limit will be lowered to about half that amount.

Seek advice from an experienced estate planning attorney to protect heirs from this important change from the IRS.

Reference: Daily Mail (July 5, 2023) “IRS quietly changes rule on how your children’s inheritance is taxed”

Should You Put Your Child’s Name on the Deed to Your House?

“If a child you’ve added to your deed goes through a divorce, has tax issues, is sued by someone, or must declare bankruptcy, your house could be on the chopping block!”

People often ask estate planning attorneys if it is possible to avoid probate after their passing simply by adding their adult children’s names to their real property deeds while they are living. As explained in the article “Think twice (and read this) before putting your kids on the deed to your home” from Coeur d’Alene/Post-Falls Press, this can theoretically work. However, it can also backfire, in a big way.

Here are the reasons to keep your property deeds in your name:

If your child has any financial problems, your home is vulnerable. Divorce, debt, litigation, or bankruptcy happen, even to the least likely children. You could lose your home. You could also end up needing to spend thousands on legal fees to convince a court that your home should not be part of the assets subject to your child’s legal or financial difficulties. Either way, you lose.

Adding your child’s name to a real property deed is a gift for tax purposes. Unless the value of your home is extremely low, which is unlikely, you’ll need to report this gift to the IRS.

If the child named on the deed passes before you, you may end up owning the home with their spouse, children, or whomever they named in their will. Did you want your daughter-in-law to be the joint owner of your home? Or your grandchildren? The outcome will depend upon the exact language used on the deed, making it vital to have an estate planning attorney draft the deed document if you use this method.

Medicaid look-back includes the transfer of any assets, including property. If you need to apply for Medicaid to help pay for long-term care, you’ll be asked if you have made any gifts or transfers of assets to anyone within the five years before submitting your Medicaid application. Adding another person’s name to a real property deed is considered a gift by Medicaid. This could prevent you from being eligible for Medicaid assistance for months or as many as five years.

Co-owners must agree on decisions about the property. Your co-owner has to agree before you can sell your home, rent it, or take out a loan against the home’s value. Can you be sure that your child or other co-owner will agree to your wishes?

Capital gains taxes as co-owners are different from inherited property. If a child inherits a property after death and then sells it, they will only be responsible for paying capital gains taxes assessed on any increase in value from the date of your death to when the property is sold. However, if their name is on the property deed while you are living, they will be deemed to have acquired their one-half ownership for half the price you originally paid. They will be responsible for the capital gains taxes applied to their half. They’ll have a hefty tax bill, which they would not have had if they inherited the home.

There are ways to plan for your estate to minimize probate without adding a child to your property deed. All of this can be done in a way that doesn’t put your property at risk if you or your child runs into financial trouble and protects your eligibility for Medicaid. An experienced estate planning attorney can help create an estate plan to protect you, your home and your heirs.

Reference: Coeur d’Alene/Post Falls Press (June 11, 2023) “Think twice (and read this) before putting your kids on the deed to your home”

What Is the Meaning of Step-Up in Basis?

“Step-up in basis, also known as stepped-up basis, is a wrinkle in the federal tax code that can help heirs avoid or reduce taxes on inherited assets.”

This aspect of the tax code changes the value—known as the “cost basis”—of an inherited asset, including stocks or property. As a result, the heir may receive a reduction in the capital gains tax they must pay on the inherited assets. For others, according to the recent article, “What Is Step-Up In Basis?” from Forbes, it allows families to avoid paying what would be a normal share in capital gains taxes by passing assets across generations. Estate planning attorneys often incorporate this into estate plans for their clients to minimize taxes and protect assets.

Here's how it works.

If someone sells an inherited asset, a step-up in basis may protect them from higher capital gains taxes. A capital gains tax occurs when an asset is sold for more than it originally cost. A step-up in basis considers the asset’s fair market value when it was inherited versus when it was first acquired. This means there has been a “step-up” from the original value to the current market value.

Assets held for generations and passed from original owners to heirs are never subject to capital gains taxes, if the assets are never sold. However, if the heir decides to sell the asset, any tax is assessed on the new value, meaning only the appreciation after the asset had been inherited would face capital gains tax.

For example, Michael buys 200 shares of ABC Company stock at $50 a share. Jasmine inherits the stock after Michael’s death. The stock’s price is valued at $70 a share by then. When Jasmine decides to sell the shares five years after inheriting them, the stock is valued at $90 a share.

Without the step-up in basis, Jasmine would have to pay capital gains taxes on the $40 per share difference between the price originally paid for the stock ($50) and the sale price of $90 per share.

Other assets falling under the step-up provision include artwork, collectibles, bank accounts, businesses, stocks, bonds, investment accounts, real estate and personal property. Assets not affected by the step-up rule are retirement accounts, including 401(k)s, IRAs, pensions and most assets in irrevocable trusts.

If someone gives a gift during their lifetime, the recipient retains the basis of the person who made the gift—known as “carryover basis.” Under this basis, capital gains on a gifted asset are calculated using the asset’s purchase price.

Say Michael gave Jasmine five shares of ABC Company stock when it was priced at $75 a share. The carryover basis is $375 for all five stocks. Then Jasmine decides to sell the five shares of stock for $150 each, for $750. According to the carryover basis, Jasmine would have a taxable gain of $375 ($750 in sale proceeds subtracted by the $375 carryover basis = $375).

The gift giver is usually responsible for any gift tax owed. The tax liability starts when the gift amount exceeds the annual exclusion allowed by the IRS. For example, if Michael made the gift in 2018, he could avoid gift taxes on a gift he gave to Jasmine that year with a value of up to $15,000. This gift tax exemption for 2023 is $17,000.

Reference: Forbes (March 28, 2023) “What Is Step-Up In Basis?”

Get These Estate and Tax Items Done Before It’s too Late

“What estate planners need to accomplish for their clients before Tax Day, as well as the regulatory changes they need to be aware of while preparing for the big day.”

This year, tax day falls on April 18 because of the weekend and because the District of Columbia’s Emancipation Day holiday takes place on April 17. Don’t let these extra days go to waste, says a recent article from Investment News, “Top things for estate planners to do before Tax Day 2023.”

Now that the SECURE 2.0 Act has taken effect, there’s much to do before the April 18 deadline. Taxpayers should review their wills and trusts to confirm that their wishes are effectively stated. However, there’s more this year. Asset valuations, family circumstances and changed laws are all reasons to review these documents. While you’re preparing taxes and reviewing net worth statements is also an excellent time to review IRA Required Minimum Distributions (RMDs), and beneficiary designations and make an appointment to review your estate plan in light of current estate planning laws.

Current federal estate, gift and generation-skipping transfer tax exemptions are currently $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. This changes dramatically on January 1, 2026, when both numbers will be cut in half. Therefore, planning needs to be done well before the dates when these exemptions shrink.

Wealthy married couples may consider using the Spousal Lifetime Access Trust. This allows the couple to gift their increased exemptions before the reduction in 2026. If the trust is drafted properly, spouses will remain in a similar economic position as long as both spouses are alive and married to each other. The SLAT benefits the donor’s spouse, while also taking advantage of these high exemptions. For example, Betty creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her husband Barney will receive income and possibly principal. While Barney is still alive and married to Betty, their lifestyle remains intact.

When Barney dies, all amounts payable to Barney end and the trust assets pass to the following or remainder beneficiaries named in the document. They may receive the trust assets outright or in further trusts. For example, the assets are held in trust for Betty’s children for their lives, and Betty’s GST is allocated to the SLAT. If the trust is created in this way, the children receive income and principal during their lives, and the trust may continue for Betty’s grandchildren without being taxed in their respective estates.

The IRS has issued guidance stating that, with certain exceptions, most completed gifts made now will not be subject to a clawback if the taxpayer dies after exemptions are reduced.

Various states have their own additional estate, gift and/or inheritance taxes and exemptions.  Your estate planning attorney will be able to explain what state-specific laws apply to your situation.

For families whose wealth is tied up in real estate property, assets can be titled differently to lower taxable estates. For example, transferring a home to a Qualified Personal Residence Trust can remove the asset from the taxpayer’s estate, while only a fraction of the home is counted as a gift. However, after the QPRT term, the grantor must pay rent to keep the home outside their estate.

For commercial property, contributing the property to an entity and then making gifts of partial interests in the entity may be helpful. However, the gifts of a portion of the entity may qualify for discounts for lack of control and marketability.

These are just a few steps to be taken before tax day 2023 and before the high exemption levels revert to pre-JCTA levels. Your estate planning attorney will know which steps are more effective for your family.

Reference: Investment News (Feb. 27, 2023) “Top things for estate planners to do before Tax Day 2023”