Although inflation is generally nothing to be pleased about, the IRS recently announced inflation-adjusted changes to the annual gift tax annual and estate tax exclusions for 2023.
If you are considering wealth transfer tax planning, these are welcome increases.
Gift Tax Annual Exclusion
Effective January 1, 2023, the gift tax annual exclusion will increase from $16,000 (2022 number) to $17,000 per recipient. This means you can gift this amount to as many people as you wish in 2023 without using up your lifetime gift and estate tax exemption or paying gift tax. Married couples who gift-split may gift a combined $34,000 per person in 2023 without making a taxable gift.
Combined Gift and Estate Tax Exemption
Another significant change, effective January 1, 2023, is the combined gift and estate tax exclusion increase. It is currently $12.06 million, increasing to $12.92 million ($25.84 million for a married couple). The combined gift and estate tax exemption is the total amount of gifts a person may make during their lifetime, including transfers made at death, before being on the hook for gift or estate tax.
Those who have used up their lifetime exclusions as of December 31, 2022, will now be able to gift another $860,000 tax-free starting January 1, 2023. Married couples in this situation may make additional gifts of $1.72 million.
Generation-Skipping Transfer Tax Exemption
Another significant inflation-related change to be aware of: The generation-skipping transfer tax exemption is also going up. It will be $12.92 million, up from $10 million.
This may be useful for an individual who wishes to place assets in a trust for the benefit of future generations. In doing so, they may allocate their generation-skipping transfer tax exemption to this trust. The result is that these assets can remain in the trust for multiple generations without any gift, estate, or generation-skipping tax due on distributions or upon the trust's termination.
However, readers should remember that these figures will revert to much lower amounts when the current Tax Cuts and Job Act expires on December 31, 2025, if Congress does not extend it or make it permanent. These exclusions will be reduced by approximately 50 percent to 2017 levels upon expiration, as adjusted for inflation.
There are a variety of planning strategies available to take advantage of these more significant exemption amounts before they are no longer available. If you have questions about how you can benefit from the increased tax exclusions, contact your estate planning attorney.