Year-End Planning Tips 2023

As we approach the end of 2023, you should aim to maximize your opportunities to transfer wealth to your children or grandchildren, accomplish your charitable goals, and engage in smart income tax planning.

With that in mind, here is a checklist of five action items to consider before year-end:

1. Make Annual Exclusion Gifts

The IRS gives you a gift tax annual exclusion each year, and in 2023, the annual exclusion is $17,000 per donee. This means that you can gift up to $17,000 per donee without using any of your lifetime federal gift exemption ($12.92M in 2023, or $25.84M for a married couple). For example, if you have two children and four grandchildren, you can make annual exclusion gifts totaling $102,000 ($204,000 if you and your spouse make annual exclusion gifts) without using any of your lifetime exemption. If you’re not ready to make larger gifts, annual exclusion gifting is an easy way to reduce your taxable estate.

One option for younger children or grandchildren is to make these gifts into a 529 Qualified Tuition Plan. You can gift five times the annual exclusion amount ($85,000 in 2023) in a single year.

You can also pay medical expenses and tuition directly to the provider or institution without using any lifetime federal gift exemption or annual exclusion amount. Let’s look at another example. If two of your grandchildren are in private high school and two are enrolled in college, you can pay their tuition directly in addition to gifting each of them $17,000. That means that, in our example, you can essentially transfer $262,000 without using any of your lifetime federal gift exemption.

Annual ExclusionTuition
Child 1 $ 17,000.00 $ –
Child 2 $ 17,000.00 $ –
Grandchild 1 $ 17,000.00 $ 30,000.00
Grandchild 2 $ 17,000.00 $ 30,000.00
Grandchild 3 $ 17,000.00 $ 50,000.00
Grandchild 4 $ 17,000.00 $ 50,000.00
Total $ 102,000.00 $ 160,000.00
TOTAL 2023 $ 262,000.00

2. Use Lifetime Federal Gift and GST Exemption

If you are ready to make larger gifts, you can transfer even more wealth to your descendants without paying gift tax. In addition to the gift tax annual exclusion discussed above, the IRS gives you a lifetime gift and GST exemption, and in 2023, the lifetime gift and GST exemption is $12.92M. This means that during your lifetime, you can gift up to $12.92M before the end of 2023 without paying gift tax by using your lifetime gift exemption. On January 1, 2026, the lifetime gift and GST exemption is scheduled to drop back down to $5M adjusted for inflation (likely around $6M in 2026). If you can afford to make larger gifts now, you can maximize the wealth transferred to your descendants, as the gifted assets and all of the growth in those gifted assets is removed from your taxable estate and not subject to estate tax at your passing. The IRS has ruled that those who make lifetime gifts until 2026 which exceed the lifetime gift and GST exemption will not be penalized. However, this is a “use it or lose it” proposition. When the lifetime gift exemption drops down in 2026, those who haven’t made larger gifts (greater than $6M) before then will have lost the opportunity to gift the higher pre-2026 lifetime gift exemption amount.

Though nothing is imminent, Congress can always pass legislation earlier to reduce the lifetime gift exemption amount before 2026. If you can afford to do so, you should consider making larger gifts to a spousal lifetime access trust (if married) or another GST-exempt trust for descendants, as that trust will be outside your taxable estate and can be structured to provide for multiple generations without ever being subject to estate tax.

We anticipate that advisors, attorneys, and CPAs will be very busy for most of 2025, so you probably won’t want to wait until December 31, 2025 to start planning for this. Reach out to your advisor now to begin these conversations.

3. Use GRATs or Intra-Family Loans

If you have already used all of your lifetime gift exemption, you can still implement estate freeze techniques that allow you to retain an asset but remove appreciation from your taxable estate.

A GRAT is an irrevocable trust in which you retain an annuity for a term of two years or more. After the GRAT annuity term ends, the remaining trust assets are distributed to the remainder beneficiaries (typically your descendants) named in the GRAT document. Intra-family loans are loans that you make to descendants or to trusts for your descendants. Both of these strategies allow you to transfer asset appreciation to the next generation without using lifetime gift exemption. All appreciation in the GRAT assets or intra-family loan proceeds in excess of the then prevailing interest rates pass to the next generation (outright or in trust) gift tax-free. The IRS publishes the relevant interest rates (IRC 7520 rate and AFR) each month. Since interest rates have risen significantly, these strategies may not be as effective as they were in lower-interest rate environments; your advisor can discuss whether these strategies make sense for you. If the GRAT outperforms the 7520 rate (5% in September 2023), you will successfully freeze the value of those assets in your estate when receiving the annuity payments, by shifting the growth in excess of the 7520 rate to the GRAT’s remainder beneficiaries without using any of your lifetime gift exemption. Learn more about GRATs here.

Intra-family loans can also be used to freeze assets in your estate while giving the intra-family borrower the opportunity to invest those assets to outperform the interest rate due on the loans. For intra-family loans, the IRS publishes the AFR each month for short-term (up to three years), mid-term (more than three years and up to nine years), and long-term (more than nine years) loans, which is the minimum rate you as lender should charge for intra-family loans. For example, you can loan $1M to a family trust for a three-year term at the September 2023 AFR rate of 4.19%. The family trust can invest the $1M loan proceeds in a high growth stock portfolio that appreciates at a rate of 8% annually. The loan will be paid back to you with 4.19% interest, but the family trust will benefit because it can invest those proceeds to generate a rate of return that exceeds the annual interest rate owed. Learn more about intra-family loans here.

4. Charitable Gifting

There are many ways to make charitable gifts. You can gift cash or appreciated assets to a public charity or a donor advised fund. For charitable cash gifts, your income tax deduction is generally limited to 60% of your AGI and for charitable gifts of appreciated assets held for longer than one year, your income tax deduction is generally limited to 30% of your AGI. If the deduction is not fully used in the first year, it can be carried over for an additional five years.

You can also provide for charities by setting up charitable remainder trusts or charitable lead annuity trusts. Charitable remainder trusts can provide a guaranteed amount to you either for life or up to a 20-year term, and at the end of that period, the remaining trust assets are distributed to the charities named in the trust document. If you have a concentrated and highly appreciated asset, charitable remainder trusts can sell the asset and reinvest in a diversified portfolio that provides you with income each year, perhaps after retirement. No tax will be due on the sale, but the tax burden will be spread out and passed along to you gradually as you receive distributions each year. Charitable remainder trusts provide you with an immediate income tax deduction subject to the same AGI limitations as described above. If you would like to learn more about charitable remainder trusts, check out this article.

By comparison, charitable lead annuity trusts provide a guaranteed amount to the charity for a term of years, and at the end of the period, the remaining assets can be distributed to your descendants named in the trust document. Charitable lead annuity trusts set up as grantor trusts can provide a large upfront income tax deduction to offset a high-income tax year and enable you to transfer appreciated assets to your descendants without using gift exemption. However, the AGI limitation for grantor CLATs is generally limited to 30% of your AGI for grantor CLATs funded with cash or 20% of your AGI for CLATs funded with appreciated assets held longer than one year. Learn more about CLATs here.

Finally, if you are 70.5 years or older, you can make qualified charitable distributions from a retirement account up to $100,000 subject to downward adjustments for deductible IRA contributions made after you turned 70.5.

5. Hold a Family Meeting

If you have family members who might inherit assets from you upon your death, the holiday season is a great time to start to plan family meetings around family values and wealth. These meetings can help things run smoothly after you pass and provide tremendous value by setting intentions around your legacy and values. Family meetings are different for each family, but a good place to start is either with a discussion about your current estate plan or just bringing the family together to talk about the family history, values, and hopes for the future. If you’re unsure how to facilitate these conversations, reach out to your advisor.

To review any of the above, please reach out to a member of the Wealthspire team. We are happy to work with your accountant or estate planning attorney to help you accomplish your charitable, financial, and estate planning goals before the end of the year.

Wealthspire Advisors is the common brand and trade name used by Wealthspire Advisors LLC, Private Ocean, LLC, and Heron Financial Group, LLC, separately registered investment advisers and subsidiary companies of NFP Corp. © 2023 Wealthspire Advisors

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