Opinion: Don’t have $13 million? The lifetime estate- and gift-tax exemptions for 2023 still matter to you.

The wealthiest families in the US will get some inflation-adjusted relief from the IRS in 2023, with lifetime estate tax exemptions increasing from $12.06 million to $12.9 million for individuals (and from $24.12 to 25, $84 million for couples) will rise to million). The annual gift tax exemption increases from $16,000 to $17,000.

Inheritance tax limits increased significantly in 2018 with the passage of the Trump-era Tax Cuts and Employment Act and are inflation-indexed along with myriad other annual items such as tax bracket thresholds, the standard deduction and the cap on FSA contributions.

While most IRS changes affect millions of Americans when they file their annual tax returns, estate and gift taxes are affecting fewer and fewer people as limits rise. The number of people filing estate tax returns fell 60% from 2010 to 2019, according to the IRS, with most returns coming from California. In 2020, the IRS only logged 1,275 taxable probate returns.

Gifts below the annual gift tax allowance do not need to be reported (gifts above the limit are reported on Form 709), so it’s not clear how many people make such gifts. But at heart, this kind of giving is as common as a birthday check from grandma—just some checks are bigger than others.

And while changes to estate and gift tax limits may not directly affect the majority of Americans, the concepts behind estate planning are important to people at every income level.

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For those with less than $13 million

Those close to the threshold for paying inheritance taxes should be aware that current limits will expire at the end of 2025, reverting to a number about half of what it was in 2023. However, that amount could change at any time if Congress passes new legislation — and depending on which political party makes the changes, the amounts could either go up or down.

“Our advice to clients with around $10 million is to give away the difference between the $10 million and what you think is the new amount if you could die after 2026,” said David Peterson, head of wealth planning at Fidelity .

Those with smaller estates must also be aware of state estate tax and inheritance rules. There are 17 states plus the District of Columbia that have some form of estate tax, some as low as $1 million.

Get joy from giving while you live

Annual gift giving has always been a popular way to pass on wealth to the next generation. The allowable amount has increased in recent years: after being $15,000 from 2018 to 2021, it increased to $16,000 in 2022 and will be $17,000 in 2023. Money paid directly to cover medical bills or to educational institutions does not count toward the gift amount for the year.

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“The great thing about this particular mechanism is that you can gift money to as many people as you want,” says Peterson.

For example, a couple with two children and four grandchildren could give each of these offspring $34,000, for a total of $204,000 in 2023. worth of contributions at a time, says Dave Jones, head of estate planning at Bailard, a San Francisco-based wealth planning firm.

This strategy has an added benefit in 2023, when by that year, money from the 529 owned by grandparents will no longer count as child income toward Free State Student Aid (FAFSA) applications and should therefore not impact college costs .

But the biggest benefit of gifting while alive? Joy.

“Many people choose to see the joy these gifts bring. It’s a lot of fun for families,” says Peterson.

A reminder to plan for everyone

While the IRS probably didn’t schedule its announcement for National Estate Planning Awareness Week, it still fits. People of all income levels need to do some form of estate planning, regardless of whether they believe they have assets worthy of being called an “estate.”

At the very least, most adults should have a Power of Attorney and a Health Directive. “These documents are about the people involved. You designate people who can facilitate your decisions when you can’t,” says Jones.

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He suggests preparing these documents any way you can, even if you’re using an online resource to do it rather than a lawyer.

Another easy-to-perform — but easy-to-overlook — task is to assign beneficiaries to all of your financial accounts, like life insurance, bank accounts, and retirement accounts, and keep them up-to-date. It costs you nothing and could save your loved ones time, money and heartache.

“It happens again and again that the beneficiaries are not named. Sometimes those are the greatest assets outside the home,” says Jones.

If you can handle a little more homework then make sure you have a right will and possibly a faith. Even though a third of people believe they don’t have enough wealth to earn a trust, according to Caring.com there are reasons other than the size of your wealth to consider it. Make sure your desires are clear. Avoiding the headache and invasion of privacy of a government-managed estate is another.

“Most people may not be aware of whether or not estate administration is an issue in their state. When that’s the case, an estate is time-consuming and expensive, so a trust is almost as important as a will,” says Jones.


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