Thoughtful estate planning takes time, but financial advisors should be mindful of certain year-end deadlines that have use-it-or-lose-it consequences for clients. Aimed at reducing the possibility of paying estate taxes, here are three time-sensitive estate planning issues advisors should consider reviewing with clients during the critical month of December:

Annual Gifting. Under current law, a taxpayer can give gifts up to a total of $12.92 million during their lifetime and not pay anything in gift taxes. This dollar amount, the lifetime gift/estate tax exclusion, is adjusted each year for inflation and beyond that may change in the future as it has in the past. Each year, however, an individual can also give a gift to another person that is not included in the lifetime gift-giving total. This year, that annual gift exclusion is $17,000. (Any annual gifting over $17,000 becomes part of the total that is used in the lifetime exclusion calculation.)

There are many reasons for advisors to remind clients of the annual gift exclusion before December 31. First, if not used, the exclusion or any unused portion cannot be rolled over into 2024 or future years. Then there are other factors that make this provision so valuable.

To start, the annual exclusion enables married couples to give $34,000 to any one person without affecting their lifetime exclusion. For those wishing to help with education savings for a child or grandchild, a provision in the Internal Revenue Code makes annual gifting especially attractive. It allows for a gift giver to make a lump sum contribution to a 529 plan of up to five times the annual gift tax exclusion and spread it over five years. If a giver were to make the maximum lump-sum contribution to a child’s 529 this December, he or she would receive an $85,000 exclusion, with that amount not reducing the giver’s lifetime gift exclusion. Each spouse can make such a contribution, doubling what a couple can give. And while the contributions are not tax deductible at the federal level, they may be deductible in your state.

Finally, taking the annual gift exclusion typically avoids any lookback or inclusion for taxes by the 12 states that impose estate taxes.

Qualified Charitable Distributions (QCDs)
IRS rules permit anyone age 70½ and older to make a direct distribution to a charity from an IRA—but not from a 401(k) or other workplace retirement plan—and have the distribution be excluded from taxable income. That’s an exclusion, not a deduction, so it eliminates 100% of the taxable income donated. What’s even more valuable is that these direct charitable contributions can be made for several years before the age of 73, when required minimum distributions (RMDs) must start.

This provision can be very important for estate planning purposes, particularly for clients trying to keep their estate values lower to avoid estate taxes. But there are two important elements to keep in mind. First, the annual cap for such donations is $100,000, which will rise to $105,000 in 2024. Second, for those clients who want the donation to count as all or part of their required minimum distribution, the rules require that the first dollars out of one’s account each year satisfy their RMD. Making the qualified charitable distribution first makes the contribution count as the RMD, giving the donor the exclusion as well as the benefit of not having to pay income tax on the RMD. If the donor doesn’t make the charitable distribution first, he or she will have a taxable RMD, although they will still benefit from the exclusion of the charitable donation.

Facing The Sunset Of The Lifetime Exemption
Due to its annual adjustment for inflation, the cap on the lifetime gift/estate tax exclusion will increase to $13.61 million in 2024. The current law, however, contains a sunset provision that will reduce the exemption by half beginning January 1, 2026. Most projections peg the future cap at around $7 million, which is still a large exemption, but for certain clients the cap reduction would create a huge estate tax exposure effectively overnight. Planning for the possibility of a lower cap is critical.

Regarding what to do now, estate planners generally fall into two camps based on the projected size of an estate. For ultra-high-net-worth clients with estates over $30 million, a “use it or lose it” strategy might be best. That translates into planning to give away most of the money before the current law sunsets. The giving could consist of a mix of direct gifts to family and the creation of trusts that can benefit future generations in the long term.

Clients whose estates are roughly in the $6 million to $30 million range should consider a range of options. If their estate is at the lower end of the range, step one is to ensure they have estate tax planning elements incorporated in their basic documents. This typically involves creating an AB trust (also known as a bypass or credit shelter trust) that creates two separate trusts after one spouse dies.

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