Blog Posts
Estates and Trusts
Case Study on Estate Tax Reduction Strategies: Business and Investment
In the following case study for business owners, Offit Kurman attorneys Herbert Fineburg and Charles “Max” McCauley illustrate an estate and gift planning strategy for removing your business from your taxable federal estate. This tax planning also works for your stock portfolio. The presentation was delivered at the Philadelphia chapter of The Exit Planning Exchange’s monthly conference.
October 14, 2022
Estates and Trusts
Historic Increase to Your Lifetime Exclusion from Federal Estate Taxes for 2023
Ironically, there is good news for some families due to rising inflation for gift and estate planning purposes. As a result of inflation adjustments built into federal estate tax laws, your lifetime exclusion from federal estate taxes is set to rise from $12.06 million per person in 2022 to almost $13 million in 2023. This is a total exclusion amount of almost $26 million per married couple [The inheritance tax rules, if any, for the state where you reside vary from state to state and are not discussed in this article]. Specifically, according to recent reports, in 2023 the estimated inflation adjustment will be $860,000, resulting in an aggregate exclusion amount of almost $13 million per person ($12,060,000 plus $860,000 = $12,920,000). This is a remarkable increase when compared to the 2022 inflation adjustment increase of $360,000, at that time the largest on record. By comparison, the inflation adjustment for 2016 was a mere $20,000. Additionally, the annual gift tax exclusion is set to rise from $16,000 per donee in 2022 to $17,000 per donee in 2023. This means you can gift up to $17,000 to an unlimited number of individual recipients without incurring gift tax consequences or reducing your estate tax lifetime exclusion. High-net-worth individuals will benefit from the inflation adjustments because they can move significant assets out of their taxable estates before the scheduled reduction of the exclusion amount on January 1, 2026, when the exclusion amount will drop by a staggering 50%. For example, in 2026, a married couple will go from being able to gift nearly $26 million free of federal estate tax to only being able to gift $12 million (adjusted for inflation) free of federal estate tax. Acting now to take advantage of the historically high exemption could save your family millions in federal estate taxes. Note: If you die before 2026, under the portability rules, your surviving spouse can carry over your unused exclusion to the surviving spouse’s federal estate tax return; otherwise, your exclusion is permanently lost. An individual who wants to take advantage of the current tax laws before they expire may loan their stock portfolio to an intentionally defective grantor trust for the benefit of the individual’s spouse or children in exchange for a promissory note that can be forgiven in 2025 — the eve of the tax law changes — using the exclusion amount before it disappears. Couples will typically consider a trust for a spouse to preserve access to the trust portfolio during the spouse’s lifetime as the trust beneficiary. In conclusion, if you expect that your taxable federal estate will be more than $6 million (adjusted for inflation) for a single individual or $12 million (adjusted for inflation) for a married couple, you should consider the federal estate tax benefits to your heirs by engaging in estate and gift tax planning. Please get in touch with Danielle Friedman or Herb Fineburg with any questions or additional estate planning techniques to reduce your taxable estate and preserve your lifetime exclusion.
October 10, 2022
Business
Avoiding an Adverse Tax Impact on Death of an S Corporation Shareholder
As Published on American Bar Association – ABA Tax Section I. Introduction One of the main reasons to consider a partnership for owning a business rather than an S Corporation is the adverse impact upon death if the business is held by an S Corporation. Now there are solutions to this problem for S Corporation shareholders that tax advisers need to add to their toolbox. These solutions convert the tax status of the business from an S Corporation to a partnership for federal tax purposes, in a federal income tax-neutral manner. This can be accomplished through liquidation in the case of a deceased shareholder or reorganization prior to death of a shareholder. A. Upon the Death of an S Corporation Owner Specifically, upon the death of an S Corporation owner, the heirs are denied the benefits of receiving a step-up in bases in underlying corporate assets to fair market value. In a partnership, the heirs receive a full income tax-free step-up in basis for all of the underling partnership assets and the benefits of obtaining the income tax shelter from new large depreciation deductions. However, in an S Corporation when the owner dies, the shareholder heirs only receive a step-up of basis in the corporate stock equal to the fair market value of the company at the date of death. The underlying S Corporation assets retain the same pre-death tax bases even though the decedent estates in both cases have the same federal estate tax implications and costs. Therefore, the S Corporation heirs should consider promptly liquidating the corporation to also achieve an income-tax neutral stepped-up basis for the company’s assets. This same technique can also be considered if a surviving shareholder buys out the estate of a deceased shareholder. If you have questions about this or any other legal matter, please feel free to contact Herb Fineburg at 267.338.1376 or Charles McCauley, III at 484.531.1712. Read the full article below.
April 1, 2021
