As the year is drawing to a close, we offer you some general advice regarding year-end planning and updated inflation-adjusted figures for 2023.

Annual Exclusion Gifts

In 2022, the annual exclusion amount is $16,000 per donee, and a married couple may gift $32,000 per donee. The limitation on gifts to non-citizen spouses is $164,000. In 2023, the annual gift exclusion will increase to $17,000 per donee (or $34,000 for a married couple per donee). The limitation on gifts to non-citizen spouses will increase to $175,000.

Gifts in cash may be made up until 11:59 p.m. on December 31 and will still count as 2022 gifts. Gifts to non-charitable beneficiaries by check must be cashed or deposited by the donee before January 1, 2023.

Please remember that 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 2022, the maximum remaining annual exclusion amount the donor may gift that child for 2022 will be $13,000. Gifts in excess of that amount will constitute taxable gifts and will reduce the donor’s lifetime exemption amount. A donor may make five years of annual exclusion contributions to a 529 plan all at once without using any lifetime exemption, but a gift tax return must be filed to report the gift (and no more annual exclusion gifts, other than any inflation-adjusted amounts in succeeding years, will be permitted for the remaining four of those five years).

Direct payments for tuition, medical expenses and health insurance premiums in respect of a donee do not count toward the annual exclusion amount for that donee and do not reduce the donor’s lifetime exclusion amount.

Trustees of insurance trusts and other inter vivos irrevocable trusts should make sure that Crummey notices are up to date. If a trust includes a Crummey power or withdrawal right, the Trustee should send notices to the Crummey power holders in a timely fashion. The Trustee should keep the Crummey notices with the trust records.

If you plan on making any year end gifts in excess of your annual exclusion amount, please contact us so that we may discuss these considerations in more detail.

Estate, Gift and Generation-Skipping Transfer Taxes

The gift, estate and generation-skipping transfer tax exemption will increase from $12,060,000 in 2022 per individual (or $24,120,000 for married couples) to $12,920,000 in 2023 per individual (or $25,840,000 for married couples). Absent a change by Congress, the maximum rate for estate, gift and generation-skipping transfer taxes on amounts in excess of those figures will remain at 40%. There is portability of a deceased spouse’s unused estate tax exemption (but not generation-skipping transfer tax exemption) to the surviving spouse.

The increased exemptions are scheduled to sunset on December 31, 2025, and on January 1, 2026, will revert to what they would have been had the 2017 Tax Act not been enacted (or $5 million, indexed for inflation from 2010). In November 2019, the Treasury Department issued final regulations to reassure taxpayers that there would be no claw-back of the exemptions should a taxpayer make gifts in excess of pre-2017 exemption amount and then die following sunset of the 2017 Tax Act. Nevertheless, taxpayers who do not fully utilize their increased exemptions through lifetime gifts may lose the additional exemptions following sunset of the 2017 Tax Act.

The exemption for nonresident noncitizens remains at $60,000 in the absence of an estate tax treaty.

State Estate and Gift Taxes

New York’s exemption from estate tax is currently $6,020,000 and will increase to $6,540,000 in 2023. However, estates worth more than 105% of the New York exemption are subject to tax on the entire estate, without any benefit from the exemption. New York does not provide for portability of a deceased spouse’s unused estate tax exemption.

New York has no gift tax, but currently does include gifts made within 3 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’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.

In 2022, Connecticut’s estate and gift taxes apply to estates and aggregate gifts in excess of $9,100,000, with a top rate of 12%. On January 1, 2023, the exemption will rise to match the federal gift and estate tax exemption (or $12,920,000).

Distributions from Retirement Accounts

Typically, if you are in pay status, you must take your required minimum distribution before year end. The CARES (“Coronavirus Aid, Relief, and Economic Security”) ACT waived required minimum distributions (“RMDs”) in 2020; however, RMDs must be taken this year.

The SECURE (“Setting Every Community Up for Retirement Enhancement”) ACT was signed into law on December 20, 2019, as part of the government’s spending bill. Starting on January 1, 2020, the following changes were made to IRAs:

• The age at which you must take your required minimum distribution increases from 70 ½ to 72. This change is effective for distributions required to be made after December 31, 2019, for individuals who attain age 70 ½ after that date.
• The maximum age for traditional IRA contributions is eliminated.
• Except in certain limited cases, inherited stretch IRAs are eliminated. As a result, non-spousal beneficiaries are required to withdraw all assets of an inherited IRA account within 10 years after the IRA owner’s death. A designated beneficiary who is a spouse, minor child, disabled or chronically ill person, or a person not more than 10 years younger than the IRA owner, is exempt from this rule. If a minor child is a designated beneficiary, the IRA benefits must be distributed within 10 years from the child attaining the age of majority.

In 2022, you can contribute up to $20,500 to an employer-sponsored plan ($22,500 in 2023), plus an additional $6,500 if you are age 50 or over ($7,500 in 2023). You may also contribute up to $6,000 (or $7,000 if you are age 50 or over) to a traditional or Roth IRA ($6,500 or $7,500, respectively, in 2023).

Periodic Document Review

It is important to review your estate planning documents. You should also review your documents periodically following changes in your personal circumstances, such as a change in marital status, the birth of a child, a change in the value of your assets or a change of domicile.

Wills and trust arrangements that contain a “formula bequest” tied to the maximum amount sheltered from federal estate tax may need to be reviewed in light of differences between the federal estate tax exemption and your state’s estate tax exemption. The doubling of the federal estate tax exemption may necessitate review of your will and trust arrangements if your assets are distributed according to tax formulas. For example, with the doubling of the estate tax exemption, a funding formula that bequeaths the maximum amount possible without incurring estate tax to a credit shelter trust or other third-party beneficiaries may result in significantly more of the estate, or even the entirety thereof, passing to the credit shelter trust or such beneficiaries and not to or for the benefit of the surviving spouse.

Life Insurance

If you have not already done so, consider whether it makes sense for your life insurance to be owned by an irrevocable life insurance trust. Such a trust could result in the death benefit of your life insurance escaping tax inclusion at your death.

529 Accounts

The 2017 Tax 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.

You should consider naming a successor owner for any 529 college savings accounts that you have created.

Successor Custodians

It is also important to name a successor custodian of Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts. Remember that if you are the donor to a UTMA or UGMA account, you should not be the custodian, because if you are both the donor and the custodian, the account will be includible in your taxable estate if you should die prior to the child’s attainment of the age of majority.

GRAT Annuity Payments

If you have a GRAT, annuity payments must be paid each year in accordance with the terms of the trust (or more often, if the trust provides).

Promissory Notes

Make sure interest payments under promissory notes are made on time and compounded if the promissory note provides.

Charitable Bunching

The increase in the standard deduction means that itemizing tax deductions each year might not make sense for donors because the sum of the taxpayer’s itemized deductions will not exceed the larger standardized deduction. The tax strategy of “bunching” allows a taxpayer to group together his or her deductions into a single year in order to surpass the itemization threshold. Different methods of bunching include making larger gifts in some years and not gifts in other years and using donor-advised funds to hold charitable funds for staggered deductions.

Certain rules relating to charitable contributions that were enacted during the pandemic have expired. Whereas the 2017 Tax Act increased the percentage limitation on cash contributions from 50% of adjusted gross income (“AGI”) to 60% for cash gifts to public charities, the CARES Act increased the AGI limitation for cash contributions from 60% to 100% of AGI. That rule has expired, and for 2022, the AGI limitation for cash contributions is back at 60 percent. In addition, the CARES Act permitted taxpayers claiming the standard deduction to deduct as an above the line deduction $300 of cash contributions ($600 for married taxpayers who file a joint return) to qualifying charitable organizations each year; that rule also has expired for 2022. The Consolidated Appropriations Act, signed into law on December 27, 2020, extended the charitable contribution limitation for 2021. These special tax rules allowed taxpayers to (i) deduct a certain level of cash contributions even if the taxpayer did not itemize and (ii) claim deductions of sums up to 100% of their adjusted gross income. Those rules have expired and have not been extended by Congress.

FinCEN Reporting Requirements to Keep in Mind

In September, the Financial Crimes Enforcement Network (“FinCEN”) issued new rules implementing beneficial ownership information reporting provisions of the Corporate Transparency Act (“CTA”) to continue its efforts to enforce rules combatting money laundering, terrorist financing and other financial crimes. The specifics of the new rules will be the subject of future reports from Seward & Kissel LLP specific to these rules. Nevertheless, you should be aware that certain companies, both domestic and foreign, including corporations, LLCs and other entities created through the filing of organizing documents (or registrations to do business) with a U.S. state or Indian tribe (a “reporting entity”) will be required to comply with substantial reporting requirements. (Trusts are excluded from the rules so long as they are not created through such filings.) The FinCEN rules will require a reporting entity to report identifying information relating to the substantial owners of the entity (i.e., those individuals who are able to make important decisions on behalf of the entity, and in certain circumstances, beneficiaries of trusts that hold interests in the reporting entity). For reporting entities formed prior to January 1, 2024, the reporting requirements must be complied with no later than December 31, 2024; for entities formed on or after January 1, 2024, the reporting requirements must be complied with within 30 days of receiving notice of creation or registration. Any change or correction to information previously reported with respect to a reporting entity must be reported within 30 days of the entity receiving knowledge of the change or correction.

Identity Theft

An increasing number of individuals are victims of identity theft. Make sure you take steps to prevent identity theft. For example, do not share personal information, collect your mail every day or place your mail on hold if you are away, shred receipts, account statements and expired credit cards, and review your credit reports annually.

For additional information on recent tax developments with respect to private wealth planning, please contact Hume R. Steyer (212-574-1555), Scott M. Sambur (212-574-1445), David E. Stutzman (212-574-1219), Lori A. Sullivan (212-574-1406) or Samuel Thomas (212-574-1609).