Tax planning should be an essential component in every comprehensive estate plan to ensure that the assets you acquire are not unnecessarily lost to state and federal taxes. While considerable uncertainty surrounding legislative action on the Build Back Better Plan was a concern for clients in 2022 there have not been any legislative proposals to accelerate the “sunset” of the federal estate tax exemption for 2023. As a result, the Tax Cuts and Job Act (“TCJA”) is still in effect through the end of 2025 and continues to offer a number of estate planning strategies that can be implemented to reduce estate tax liability before the law sunsets on December 31, 2025.
The following is a summary of important 2023 updates related to federal and state taxes for the New York metropolitan area that should be considered for estate planning purposes.
Annual Exclusion Gifts
- Exclusion Amount. For 2023, the annual gift exclusion increased from $16,000 to $17,000 per donee, and from $32,000 to $34,000 for a married couple per donee.
- Gifts to Non-citizen Spouses. While married couples can gift an unlimited amount of money to their spouses during their lifetime without imposing a tax liability issue if they are U.S. citizens that does not apply if the recipient spouse is not a U.S. citizen, and regardless of whether the non-US citizen spouse is a resident or nonresident of the United States, the amount of tax-free gifts is limited to an annual exclusion amount. For example, in 2023 the limitation on gifts to non-citizen spouses increased to $ 175,000 from $164,000.
- Crummey Notice Gifts & 529 Plans. Contributions to 529 college savings plans and transfers to insurance Trusts and other inter vivos Trusts that are subject to “Crummey” powers of withdrawal count toward a donor’s total gifts to the donee for that year. For example, if a single donor contributes $3,000 to a 529 plan for a child in 2023, the maximum remaining annual exclusion amount the donor may gift that child for 2023 will be $14,000. Gifts that exceed the annual exclusion amount will constitute taxable gifts and will reduce the donor’s lifetime exemption amount.
- 529 Accounts & 5-Year Contribution Rule: A donor may make five years of annual exclusion contributions to a 529 plan at one time without reducing the lifetime exemption; however, a gift tax return must be filed to report the gift.
- Direct Payments For Tuition. Direct payments for tuition, medical expenses, and health insurance premiums for a donee do not count toward the annual exclusion amount for that donee. As such, they do not reduce the donor’s lifetime exclusion amount.
Federal Estate, Gift, and Generation-Skipping Transfer Taxes
- Exemption Amount. For 2023 the federal gift, estate, and generation-skipping transfer tax exemption increased from $12,060,000 to $12,920,000 per individual and from $24,120,000 to $25,840,000 for married couples. For example, those who have used their lifetime exclusions as of December 31, 2022, will now be able to gift another $860,000 tax-free starting January 1, 2023. And for married couples that have used their lifetime exclusions as of December 31st, 2022, they may make additional gifts of $1,720,000.
- Tax Rate. The maximum rate for estate gift and generation-skipping transfer taxes remains at 40 percent unless there is a change by Congress.
- Portability. Unlike New York law the federal law provides portability for married couples which means upon the death of the first-to-die spouse their unused federal exemption “ports” or passes, to the surviving spouse which means that the exclusion amount doubles to $25,840,000 (for 2023) if the surviving spouse makes a “portability” election and files a timely estate tax (Form /706) return upon the death of the first to die, spouse. It is important to note that the portability does not “port” or pass the deceased spouse’s unused generation-skipping transfer tax exemption to the surviving spouse.
- Sunset Provision. The current exemption is based on the Tax Cuts and Jobs Act (“TCJA” ) that will sunset at the end of 2025, which means that the federal exemption amount will revert back to the previous lifetime exemption amount of $5 million before TCJA was enacted and indexed for inflation.
- Claw–Back and Unused Exemptions. In November 2019, the Treasury Department issued final regulations to reassure taxpayers that there would be no clawback of the exemption should a taxpayer make gifts exceeding the pre-2017 exemption amount and then die following the sunset of the 2017 Tax Cut Job Act. Taxpayers who do not fully utilize their increased exemptions through lifetime gifts, however, may lose the additional exemptions following the sunset of the TCJA.
- Federal Estate Tax Exemption for Non–Resident Aliens. The exemption for nonresident aliens remains at $60,000 in the absence of an estate tax treaty.
State Estate and Gift Taxes
- New York Estate Tax Exemption Amount. The New York estate tax exemption amount for 2023 is $6,580,000 (up from $6,110,000). The exemption does not apply, however, to estates worth more than 105% of the New York exemption, meaning the entire estate is subject to tax, commonly referred to as going over the “cliff”.
- The New York “Cliff”. It is important for New Yorkers to keep in mind a quirky rule related to the calculation of New York estate tax. The law eliminates the New York exclusion amount if the value of the estate is 5% higher than the applicable New York estate tax exemption at the time of death, as a result, the exemption is totally lost and the estate tax is due from dollar one.
- Tax Rate. The “New York estate tax range is between 5% and approximately 16% if the value of the estate is 5% higher than the applicable state exemption amount while the federal estate tax rate for any amount over the application federal exemption amount is 40%.
- Estate Tax Implications for Married Couples. For federal and state estate tax purposes, you can leave an unlimited amount to your spouse if they are a United States citizen.
- Portability. New York does not provide for the portability of a deceased spouse’s unused estate tax exemption. Thus, the exemption is lost completely unless tax strategies are incorporated into the deceased spouse’s estate plan before death.
- New York Gift Tax. New York has no gift tax but currently does include gifts made within three years of death in the estates of New York resident decedents who die on or between January 16, 2019, and December 31, 2025.
- New Jersey Gift, Estate, and Inheritance Tax. New Jersey’s estate tax was repealed for decedents dying on or after January 1, 2018. New Jersey does not have a gift tax, but it does impose an inheritance tax on transfers to collateral relatives, including siblings, nieces, nephews, and unrelated individuals. The tax rate depends on the relationship between the decedent and the beneficiary, and the amount received – the range is between 11% and 16% but no inheritance tax for the surviving spouse or children.
- Connecticut Gift and Estate Tax. The Connecticut estate tax exemption is $12,920,000 and is the only state in the country with a gift tax exemption that matches the federal exemption for 2023.
If you do not already have an irrevocable life insurance Trust (ILIT) in place, consider establishing one. Proceeds of a life insurance policy that is owned by an ILIT avoid inclusion on your estate assets and, therefore, are not taxable for federal gift and estate tax purposes. The Trustees should make sure that Crummey notices are up to date, sent to the Crummey power holders in a timely fashion, and copies of the notices kept with the Trust records.
For example, if you transfer the ownership of your life insurance policy to an ILIT and there are 5 beneficiaries of your ILIT. You can use your annual exclusion amount for each beneficiary and make a contribution to the Trustee who in turn can use the money to pay for the premiums. If the annual exclusion is $17,000 the annual gift to the Trustee can be $80,000 (5 x $17,000 per year) and for a married person, $160,000 (5 x $34,000 per yield) thus reducing the value of their estate for estate tax purposes and annual exclusion amount made to the Trustee is not counted against your federal lifetime exclusion.
A donor may make five years of annual exclusion contributions to a 529 plan at one time without reducing the lifetime exemption; however, a gift tax return must be filed to report the gift. The 2017 Tax Cut & Job Act expanded the federal income tax benefits of 529 Plans by allowing qualified withdrawals of up to $10,000 for tuition for K-12 education. Since each state has its own law concerning 529 Plans, you should confer with your tax advisor as a withdrawal of $10,000 for K-12 education may not be exempt for state income tax purposes.
If you have not yet done so, consider naming a successor owner for any 529 college savings accounts that you have created.
The Secure Act enacted in 2020 and the passing of Secure 2.0 in December 2022 made some important changes to 529 plans. Secure 2.0 allows the transfer of 529 plans to ROTH IRAs, if certain conditions are met.
It is also important to name a successor custodian of your Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts. If you are the donor to a UTMA or UGMA account, you should not be the custodian because that makes the account part of your taxable estate if you should die prior to the child’s attainment of the age of majority.
The estate planning attorney at Amato Law, PLLC looks forward to helping you incorporate tax planning into your comprehensive estate plan. Contact our office today by calling 212-355-5255 or filling out our online contact form.