November 29, 2022

Gift, Estate and Income Tax Planning Opportunities

Gift, Estate and Income Tax Planning Opportunities Year-End Tax Guide


The federal estate and gift tax exemption is $12,060,000 for 2022. That amount increased from $11,700,000 in 2021. The exemption is scheduled to increase to $12,920,000 per person in 2023. Given the significant increase, taxpayers should consider using the increased exemption amounts, especially since this amount is scheduled to be reduced to approximately $6 million in 2026.

Spousal lifetime access trust

Married taxpayers may want to make lifetime gifts to use the balance of their exemptions but may be uncomfortable in not having access to the gifted funds. These taxpayers should consider making gifts to a spousal lifetime access trust (SLAT). The taxpayer who creates the trust will include his or her spouse as a beneficiary. By including the spouse as a beneficiary, the donor (grantor) grants the spouse direct access to the SLAT assets. While this is a completed gift for gift and estate tax purposes, a SLAT is generally taxed as a grantor trust for income tax purposes, allowing the trust assets to further grow tax-free for the spouse and any other beneficiaries. The payment of the income tax on a grantor trust does not constitute an additional gift, allowing the grantor to transfer additional wealth free of gift or estate tax.

Sell Assets To An Intentionally Defective Grantor Trust

  • A taxpayer may sell assets to a grantor trust in exchange for a promissory note. (Real estate owners often are great candidates for this strategy.)
  • By using a grantor trust, the sale of appreciated assets will not trigger income tax. In addition, the grantor will continue to pay income taxes on the trust income, thereby allowing the trust assets to grow tax-free. This strategy is ideal for assets with high potential for appreciation. Further, the payment of the income tax on a grantor trust does not constitute an additional gift.

Grantor Retained Annuity Trusts (GRATs)

  • With market volatility and assets trading at depressed values, a Grantor Retained Annuity Trust (GRAT) enables a taxpayer to transfer assets to a grantor trust. The taxpayer retains an annuity interest for a period of years and leaves the remainder to their children.
  • If the assets appreciate during the trust term, the appreciation passes to the heirs without using any of the taxpayer’s lifetime exemption amount.
  • This type of trust can be structured as a zeroed-out GRAT; effectively, no lifetime gift or estate tax exemption would be used on the gift to the trust.
2022 Marcum Year-End Tax Guide

Annual Exclusion Gifts

The 2022 annual gift exclusion is $16,000. This is the amount that can be gifted per person per year, tax-free. In addition, married couples can elect to split gifts. Utilizing this strategy, married taxpayers can gift up to $32,000 to an individual in 2022 before a gift tax return is required. In 2023, the annual exclusion increased to $17,000.

Annual gifting is an excellent way to reduce the value of a taxpayer’s gross estate over time, thereby lowering the amount subject to estate tax. Keep in mind, if gifting to a trust an amount equal to the annual exclusion (or less), you should consult with your tax advisors about whether a gift tax return should be filed, despite the gift amount falling within the annual exclusion limits. The rules on gifts to trusts are rather complex, and generation-skipping transfer tax laws must be considered on all gifts to trusts (as well as gifts outright to individuals that skip generations).

65 Days and Fiduciary Tax Planning

It is not common that the tax law allows for planning to be done after the close of a taxable year. In the context of fiduciaries, an election under the code is available that allows for income tax planning between the fiduciary and beneficiary. Thanks to the IRC 663(b) election, or known by its street name as the “65-day election,” a fiduciary can elect to treat distributions made within the first 65 days of a year, as if those distributions were made during the prior tax year. In effect, this could accomplish the shifting of income from the fiduciary to a beneficiary. Beneficiaries are often in lower income tax brackets than a trust or an estate thanks to the compressed tax brackets of trusts and estates. The highest bracket for a trust or estate for 2023 starts at $14,450 of taxable income. Contrast this to the highest bracket for a taxpayer filing as single, which starts when taxable income exceeds $578,125.

  • This election applies only to estates and non-grantor trusts that file as “complex trusts.” Grantor trusts and non-grantor trusts that are “simple trusts” do not qualify. A simple trust is any trust that requires fiduciary accounting income to be distributed. A complex trust is not a simple trust. The maximum amount of distributions covered by the election is limited to the greater of (1) fiduciary accounting income for the tax year for which the election is made or (2) distributable net income (DNI).

Charitable Lead Trust

Unique planning to those who expect 2023 to be an unusually high year for income due to a one-time event, such as a business sale. If you find yourself in this position, and you have a charitable inclination, then you should consider a special type of trust that allows you to reduce your effective tax rate on the sale of your company (or other asset), while benefiting your favorite charity of choice.

The grantor charitable lead trust effectively frontloads a charitable income tax deduction, which in turn, can offset other sources of income. The trust will then pay an annual unitrust or annuity payout to charities of choice, and at the end of the trust term, the remaining principal can revert to you or to your loved ones.

Charitable Remainder Trust

In a period of rising interest rates and record inflation, there are a couple of wealth transfer tax strategies that become more powerful. One such strategy is the charitable remainder trust. A taxpayer with an asset that has a large unrealized gain (such as real estate, stocks or closely held business) can effectively contribute that asset to this type of trust. The trust is tax-exempt (state tax laws may differ) and can effectively sell that asset on a tax-deferred basis. The taxpayer will also get a charitable income tax deduction on their personal tax return in the year of funding.

This deduction amount is partially a function of the section 7520 rate. Rising interest rates means a rising section 7520 rate. The government assumes the remainder interest passing to charity in a rising interest rate environment will be greater than in a low interest rate environment. As interest rates continue to rise into 2023, the tax deduction becomes more powerful.

Other strategies not covered in this article may also be employed such as gifts to qualified personal residence trusts and funding 529 plans (education planning) for children and grandchildren, among other planning options. Taxpayers should also consider state and local tax laws, and how they may differ from federal tax law with respect to estate planning.

Consult your Marcum tax professional to discuss gift, estate and income tax planning strategies that may be appropriate for your unique facts and circumstances.