It's official – the 2023 individual estate tax exclusion is set at its highest level ever - $12,920,000.00 per person, or $25,840,000.00 for a married couple.  This is a $860,000 increase from 2022.

For high-net-worth individuals and families who wish to reduce their taxable estate, this is a continued opportunity to gift tax-free into 2023.

Another way to take advantage of the highest estate tax exclusion of all time is to claim the portability election in the event a spouse dies in 2022 or 2023.

For a married couple whose estate is under $25,840,000 but above $6,000,000 claiming “Portability” (by filing an Estate Tax Return within 9 months of spouse's death) permits the surviving spouse to “port” or “transfer over” to the second death the unutilized portion of the deceased spouse's individual estate tax exemption.

This is especially important since – under current tax law – the individual exemption is set to return to its 2017 value, indexed for inflation – or, to about $6,000,000 on January 1, 2026. Put differently, on January 1, 2026 decedents' estates that exceed the $6 million exemption will be subject to estate tax – whereby the top tax rate is 40%!  The portability election that is afforded to a surviving spouse empowers that spouse to preserve the unused amount of the deceased spouse's exemption – and apply such at the second death – to vastly reduce or completely eliminate estate taxes at the second death. To deadline to claim the portability election is nine months of first-to-die spouse's death.

Another way to chip away at a taxable estate is to take advantage of the Annual Gift Tax Exclusion – which is increased to $17,000 per person for 2023. This means that a married couple can give (jointly) $34,000 to each of their children, each of their grandchildren, or any other individual, without having to file a Gift Tax Return in 2023, provided these individuals are US Citizens.

Annual gifts to non-US Citizen Spouse is set to $175,000 in 2023. This is very important for married couples where one spouse is not a US Citizen as non-US-Citizens spouses are not entitled to utilize the “unlimited marital deduction” that US Citizen spouses enjoy.  Lifetime gifts to a non-US-Citizen spouse would decrease the US Citizen spouse's taxable estate, while passing the family assets to the non-US-Citizen spouse estate-tax-free by way of such annual gifts.

Such couples would also be very wise to set up a Family Qualified Domestic Trust (a QDOT Trust) which mimics the unlimited marital deduction that US-Citizen-spouses enjoy by deferring payment of estate taxes to the second death – if lifetime gifting is not a preferred method of estate tax avoidance.

Finally, the IRS announced that it will retain records of Estate Tax Returns and Gift Tax Returns for only 40 years instead of the current 75 years. These tax reporting documents are very important and should be retained with great care in the family as they might be needed and requested by your CPA decades after they have been filed with the IRS.

To get started on your estate planning, or to update an existing estate plan, contact our Office – we are here to help.