Year-End Financial Planning Considerations: Part 2 - Trust Point

Year-End Financial Planning Considerations: Part 2

People planning for year end financials

As year-end approaches, it can be easy to get caught up in the hustle and bustle of the holidays instead of keeping year-end planning top of mind. This blog will cover five considerations that could provide meaningful benefits to you, and is a follow-to Planning Opportunities to Consider Before Year-End: Part 1.

Utilize Annual Exclusion Gifts

Individuals are allowed to make “annual exclusion gifts” which do not have gift tax implications. In 2023, the annual gift tax exemption is $17,000 per donee.

For high net worth individuals with – or likely to one day have – a taxable estate, utilizing annual exclusion gifts is an effective way to reduce one’s taxable estate while also helping loved ones.

As an example, consider Mike and Mary Jones – a very wealthy couple with two married children (four spouses total) and five grandchildren. In 2022, the Joneses, as a couple, could gift $34,000 to each of the nine individuals for a combined total of $306,000, without such gifts counting against their lifetime gift tax exemption. In making these annual exclusion gifts each year, the Joneses are able to carve out a notable portion from their taxable estate.

It is also worth noting that medical payments made directly to a medical provider do not count as taxable gifts. Furthermore, tuition payments made directly to an educational institution do not constitute taxable gifts. Tuition is narrowly defined as the cost for enrollment; it does not include books, supplies, or room and board.

Utilize the Lifetime Gift Tax Exemption

The Tax Cuts and Jobs Act (TCJA), which was passed in December 2017, approximately doubled the estate exemption from $5.49 million per person in 2017 to $11.18 million per person in 2018. The lifetime gift tax exemption currently stands at $12.92 in 2023, with a top federal estate tax rate of 40%.

The increased exemption amounts, under TCJA, are scheduled to run through 2025, after which the basic exclusion amount (BEA) is set to revert to the 2017 level of $5 million per person, plus inflation adjustments.

In recent years, the Biden administration and certain congressional leaders have proposed, albeit unsuccessfully, to lower the exemption amount.

While the elevated exemption is scheduled to remain in place through 2025, high net worth individuals should not lose perspective of the unique planning opportunity to get additional assets out of one’s taxable estate.

High net worth individuals should evaluate current assets and assess how much might be needed for their remaining lifetime, with consideration to gift ‘excess assets’ to loved ones. Depending on the size of an outright gift, estate planning which incorporates making gifts to trusts may be advisable to provide parameters or safeguards for the intended beneficiaries.

As a reminder, the Treasury Department and IRS issued final regulations in November 2019 clarifying that taxpayers taking advantage of the increased exemption amounts would not be subject to a future clawback, should the exemption amount decrease from current levels.

Review Estate Plans & Beneficiary Designations

As a matter of best practice, individuals should periodically review estate plans and beneficiary designations to ensure such plans and documentation align with desired intentions, as well as with changing rules and limits.

Individuals who have recently experienced a significant life event (marriage, divorce, birth/adoption) may also need to make updates to existing estate plans and beneficiary designations.

As it relates to retirement account beneficiaries, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted on January 1, 2020, effectively eliminated what was known as “the stretch IRA,” for which a beneficiary could stretch required minimum distributions (RMDs) for an inherited retirement account over their lifetime. Under the SECURE Act, most non-spouse beneficiaries (who inherit a retirement account after 2019) will be required to fully withdraw all inherited retirement assets by the end of the tenth year after the original account holder died.

Evaluate When to Collect Social Security Retirement Benefits

Individuals nearing eligibility for Social Security retirement benefits should give proper consideration for when to start benefits.

A review of 2016’s new Social Security recipients1 showed nearly 60% of individuals collected benefits before their full retirement age (FRA), with only 10% waiting beyond full retirement age.

While general guidance is to wait until age 70 (if possible) to collect a higher benefit, there are a number of important factors to consider: anticipated life expectancy, income needs for the interim years when benefits would be delayed, availability of spousal benefits, etc.

Consider a Change in State Residency

Changing your primary state of residency is not as simple as spending more than half the year in a new state. With many states more aggressively contesting such residency changes, individuals should take extra precaution to ensure that “facts and circumstances” support the case for changing one’s resident state. Some of the factors that support a new domicile include: days spent in the new state for the year, driver’s license registration, voter registration, medical and dental care providers, country club or social club memberships, official mailing address to which mail and bills are sent, location of family heirlooms and artwork, etc.

Have Questions? Contact Our Team

As the year comes to a close, your financial team at Trust Point is reviewing your accounts and may reach out to discuss one or more of these year-end opportunities.  We are here to help guide you through these considerations. Reach out to our team at 800-658-9474 or fill out our online contact us form to start a conversation.

1 “It’s Tempting to Take Social Security at 62. You Should Wait.” By Peter Finch. The New York

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