Annually, the Internal Revenue Service (IRS) adjusts certain tax exemptions that significantly affect estate plans for high-net-worth individuals. It is essential for individuals to understand these exemptions and to ensure that their estate plans are appropriately drafted to take full advantage of such exemptions. Without careful planning, estates may be subject to high tax rates that will significantly decrease the amount of wealth passed to heirs.
Effective January 1, 2023, the federal estate and gift tax exemption is $12.92 million per individual (increased from $12.06 million) and, given that the IRS allows married individuals to combine their exemption, $25.84 million per married couple. To the extent an estate is less than the exemption amount, the estate can entirely avoid the imposition of any federal estate tax. To the extent the estate exceeds the exemption amount, the excess amount of the estate will be subject to the federal estate tax (which may be up to 40%) unless a tax-sensitive estate plan is in place.
Also, effective January 1, 2023, the federal gift tax exclusion is $17,000 per recipient (increased from $16,000) and $34,000 per recipient per married couple. This exclusion allows a taxpayer to annually gift up to $17,000 tax-free without using any of the taxpayer’s lifetime gift and estate tax exemption. In the event a taxpayer gifts more than the exclusion amount to a recipient in a given year, the excess amount will reduce the then-applicable exemption amount.
The above-noted exemptions are applicable to gifts and deaths that occur in 2023. Although the IRS will continue to adjust these rates annually based on inflation, these rates are based on legislation that is scheduled to sunset on December 31, 2025. If Congress allows this legislation to sunset, effective January 1, 2026, the current federal estate and gift tax exemption will be cut in half and personal wealth in excess of approximately $6-7 million could be taxed at 40%. Fortunately, with careful estate planning, this can be avoided.
If you are a high net-worth individual, the time to put an estate plan in place is now. Today is never too soon to be planning for tomorrow. What will your legacy be?
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
