Top things for estate planners to do before Tax Day 2023

Tax Day falls on Tuesday, April 18, this year — not April 15 — because of the weekend and the fact that the District of Columbia's Emancipation Day holiday occurs on Monday, April 17.

Estate planners and their clients shouldn’t let those extra days go to waste. There’s a lot to do, especially now that the SECURE 2.0 Act has taken effect.   

InvestmentNews caught up with Greg Matalon, partner with Capell Barnett Matalon & Schoenfeld, to get his views on what needs to be done for clients prior to Tax Day, as well as the regulatory changes that estate planners need to be aware of while preparing for the big day.  

InvestmentNews: What should taxpayers and their estate planners be doing right now to prepare for Tax Day 2023?

Greg Matalon: Taxpayers should regularly review their wills and trusts to confirm that their wishes are effectively stated. It is also important to review planning documents when asset valuations, family circumstances and laws change. A taxpayer’s annual meeting with their accountant is a good time to review net worth statements, to review IRA required minimum distribution amounts, to review beneficiary designations and to plan to meet with their attorney and wealth advisors to review current estate planning laws and possible gifting strategies.

IN: Although it’s a long way off, how should clients prepare for the halving of the federal estate exemption on Jan. 1, 2026?

GM: The current federal estate, gift and generation-skipping transfer tax exemptions are $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. On Jan. 1, 2026, these exemptions are scheduled to be reduced by one-half. As such, taxpayers should consider utilizing the increased exemptions before they expire. Wealthy married couples may wish to consider utilizing the spousal lifetime access trust. By doing so, the couple can gift their increased exemptions prior to the reduction in 2026. If the trust is drafted properly, the spouses will remain in a similar economic position, as long as both spouses are alive and married to each other.

A SLAT can provide benefits to the donor’s spouse while also taking advantage of the current high federal exemptions. For example: Assume Wilma creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her spouse, Harry, will receive income and possibly principal. As such, while Harry is alive — and on good terms with Wilma — the standard of living of Harry and Wilma may continue unaffected.

Upon the death of Harry, all amounts payable to Harry cease and the trust assets pass to the next, or remainder, beneficiaries named in the trust document. Such remainder beneficiaries can receive the trust assets outright or in further trust. Suppose the assets are held in trust for Wilma’s children for their lives, and Wilma’s GST exemption is allocated to the SLAT. In that case, the children can receive income and principal during their lives, and the trust can continue for Wilma’s grandchildren without being taxed in Wilma’s children’s respective estates.

The IRS has issued guidance that, subject to various exceptions, most completed gifts made now will not be clawed back if the taxpayer dies after exemptions are reduced.

IN: Some states, like New York, also offer additional exemptions. How can advisors utilize state exemptions to their clients’ advantage?

GM: Various states have their own estate, gift and/or inheritance taxes and exemptions. For example, New York has no gift tax, however a gift made within three years of the date of death may be included in the calculation of the New York State estate tax. As such, if a gift is made and the client survives the three-year period, when she dies, she will have a full New York state estate tax exemption, according to current law. This is particularly important to many due to the New York state cliff.

In addition, New York state estate tax does not tax out-of-state real property and out-of-state tangible personal property. But if the out-of-state real property is placed in an LLC, then the LLC units are part of the New York State resident’s taxable estate.

IN: For those clients whose wealth is wrapped up in real estate, both residential and commercial, how can planners title assets appropriately to lower taxable estates?  

GM: Transferring a home to a qualified personal residence trust can help remove such asset from the taxpayer’s estate while only a fraction of the home’s value will be counted as a gift. After the QPRT term, the grantor should pay rent to keep the home outside of his or her estate. For commercial real property, contributing the property to an entity and then making gifts of partial interests in the entity may be helpful. The gifts of a portion of the entity may qualify for discounts for lack of control and lack of marketability. This will reduce the value of the gift and preserve estate and gift tax exemption for future use.

IN: How will increased interest rates affect estate planning decisions?

GM: For a grantor retained annuity trust, a common estate planning tool, the increased interest rates return more wealth to the creator of the trust, which may result in less value passing to the remainder beneficiaries. However, for a qualified personal residence trust, the higher interest rates help to reduce the value of the gift, thereby allowing the donor to preserve gift and estate tax exemption.

IN: How will the SECURE 2.0 Act change the way you plan for clients? Like donating to charity, for example.

GM: Clients with large retirement accounts are considering Roth conversions — especially during down markets. In addition, clients are choosing to make current/future charitable contributions from their pretax retirement accounts. For example, if an IRA is given to charity by beneficiary designation, on the death of the owner, there will be no income for the family to report, and a charitable deduction may be available for estate tax purposes.

If a taxpayer wishes to make a current donation to a charity and is otherwise eligible for a qualified charitable distribution, then the IRA withdrawal will not increase the taxpayer’s income. It will also reduce the taxpayer’s estate. There are additional charitable planning techniques available depending on a taxpayer’s charitable intent and his/her income/estate tax goals.