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  • Barry Boscoe

2023 Estate & Gift Tax Changes

The index used for increases in estate and gift tax exemptions is the chained Consumer Price Index for all Urban Consumers. Due to the large increase in the consumer price index over the last 12 months, the estate and gift tax exemptions and exclusions will significantly increase in 2023. The following is a brief summary as to how the annual inflation adjustment affects the estate and gift tax exemptions and exclusions.

Unified Estate and Gift Tax Exemptions

The current estate and gift tax exemption is $12,060,000. Due to the annual inflation adjustment, the exemption will increase to $12,920,000 per person. This is the amount tax payors can shelter from gift and estate taxes whether the transfer is made during lifetime or at death. Under the tax cuts and jobs act of 2017, this amount is scheduled to reduce on January 1st 2026 under current law to $5,000,000 adjusted for inflation or approximately $6,500,000 or more per person.

A concern facing many clients who would like to utilize the large estate and gift tax exemptions is they may not want to gift to their children such large amounts. One way of addressing this concern is to consider making a gift to a trust for the benefit of the children. Allow the trust to accumulate the income and later make discretionary distributions to the children. Another type of trust that might be utilized would be a Grantor Trust also known as a Defective Income Trust. The client would retain the cash flow from these assets even though they are held in the children’s trusts possibly in the form of a promissory note.

There has been proposed legislation to eliminate the use of these types of trusts but this proposed legislation has never been placed into law. It is unlikely, due to the political split, that such tax legislation will be passed in the foreseeable future thus allowing this favorable planning technique to remain in place.

Gift Tax Annual Exclusion

The current exclusion is $16,000 per donee. This amount will be increased to $17,000 per donee or $34,000 for a married couple to each of their children and or grandchildren. By utilizing the annual exclusion, gifts can be done without utilizing any of the increased lifetime unified exemption mentioned above.

Estate Gift Tax Rate

Currently the marginal estate and gift tax rate is 40% and will likely not increase unless congress amends the Internal Revenue Code (IRC).

Generation Skipping Transfer Tax (GST)

The generation skipping transfer tax is leveed in addition to any estate and gift taxes, imposing an additional 40% on any properties transferred by gift or at death to grandchildren, other defined skipped persons, and later generations. This is the case whether the transfer is done directly or through a trust. In gifting, utilizing the annual exclusion or in drafting trust documents, the goal would be to avoid paying the additional 40%. One method of avoiding this is to take advantage of the current high GST exemption by gifting now into a trust equal to the exemption to benefit the grandchildren and later generations. These trusts are commonly known as “Dynasty Trusts”.

Step Up in Basis at Death

In community property states such as California, both halves of the community property will receive a step up in tax basis at the first spouse’s death. Planning has now taken a little bit of a twist and changed from estate tax planning, due to the high exemptions, over to capital gain tax planning.

One way to make sure that assets receive a complete step up in basis, is to not title assets in “joint tenants” or “tenants in common”. Properties should be titled either in the name of the trust or community property.

It is unlikely that congress will enact any new estate and gift tax legislation prior to 2024 elections. Part of the reason is that estate and gift taxes are not major revenue raisers for the government and that current or future tax legislation will most likely focus on raising tax revenues in order to reduce the federal deficit and bring down inflation. Now is the time to begin to utilize the current high estate and gift tax exemption and exclusion amounts, as well as tax advantage trusts, in order to shift family’s wealth to the lower generation.

If you have an interest in exploring any of the above, please do not hesitate to contact me. You may also use my calendar link below to set up a brief exploratory call.

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