Dear Clients and Colleagues:
This letter discusses major planning issues related to recent estate and gift tax developments. Specifically, this letter provides updates related to the potential decrease of the estate, gift and generation-skipping transfer tax exemptions. Moreover, this letter also highlights key aspects of Setting Every Community Up for Retirement Enhancement 2.0 ("SECURE Act") which expands on the prior SECURE Act passed in 2019, and the Corporate Transparency Act ("CTA"). Note that there have been many changes, and only through individual consultation can we adequately assess how these changes may impact a specific client's situation.
Estate, Gift and Generation-Skipping Transfer Taxation
The Tax Cuts and Jobs Act of 2017 (the "2017 Act") doubled the estate tax, lifetime gift tax and generation-skipping transfer ("GST") tax exemptions beginning in tax year 2018. Exemption amounts will continue to increase with yearly inflation adjustments through tax year 2025, at which time the exemption amounts will revert to pre-2018 amounts. The 2017 Act maintained the 40% estate tax, gift tax and GST tax rates for amounts above the exemption. The 2017 Act also preserved the stepped-up basis treatment of assets at date of death.
The new transfer tax exemptions for 2024 are as follows:
- $13,610,000 federal estate tax and lifetime gift tax exemption (increased from $12,920,000 in 2023)
- $13,610,000 GST tax exemption (increased from $12,920,000 in 2023)
- $18,000 annual gift tax exclusion (increased from $17,000 in 2023)
- $185,000 annual exclusion for gifts to a noncitizen spouse (increased from $175,000 in 2023)
These increased exemptions create opportunities to make larger lifetime and GST exempt gifts, to leverage more assets through a variety of estate planning techniques, and to shift income-producing assets to individuals such as children or grandchildren, who may be in lower income tax brackets and/or reside in states with low or no state income tax.
Clients should review their existing trust instruments to ensure they are still in line with their current objectives. This is particularly important for plans that are designed to allocate or distribute amounts based on the available estate tax exemption or GST exemption.
As a reminder, unlimited tax-free transfers can be made for certain medical and educational expenses, but only if the payment is made directly to the medical provider or educational institution.
Absent further legislation, in 2026, the higher exemption amounts will revert to prior levels under the American Taxpayer Relief Act of 2012 ($5,000,000 per taxpayer, indexed for inflation). As a result, it is critical for clients who are considering lifetime gifting strategies to seek the guidance and advice of their professional team (e.g.: attorney, accountant and financial advisor) in 2024 to take advantage of the higher exemption amounts before their expiration on December 31, 2025.
2023 Gift Tax Returns
Gift tax returns (IRS Form 709) for gifts made in 2023 are due on April 15, 2024. This deadline may be extended to October 15, 2024, with a timely filed request for an automatic extension to file 2023 income tax returns. However, the extension does not extend the time to pay any gift taxes that may be due.
Clients who have grantor retained annuity trusts ("GRATs") and/or qualified personal residence trusts ("QPRTs") that terminated in 2023 should contact their CPA to discuss filing gift tax returns.
SECURE Act 2.0
The SECURE Act of 2019 created key reforms to laws governing retirement plans. The Act provided individual retirement account ("IRA") owners and participants in qualified plans (collectively a "Participant") additional time to contribute to their IRAs and delayed the withdrawal of required minimum distributions ("RMDs"). On December 29, 2022, the SECURE Act 2.0 was signed into law. There are too many changes to list here, but we want to make sure you are aware that changes have been made with regard to IRA distributions that will affect each Participant differently. Individuals with significant value in traditional IRAs may want to consider advanced planning techniques. To understand how they apply to you, we recommend that you speak to your tax or financial advisor.
Corporate Transparency Act
In 2021, Congress enacted the Corporate Transparency Act ("CTA") as a means to identify the true owners of entities. This applies to all limited liability companies (LLCs), limited partnerships (LPs), C Corporations, S Corporations, and General Partnerships, if they are registered with a Secretary of State.
Specifically, the CTA imposes reporting requirements on entities that are formed by filing with the Secretary of State of any jurisdiction in the United States or foreign entities that have registered to do business in the United States. The CTA requires the reporting entity to disclose information regarding (i) every individual who, directly or indirectly, exercises authority over the reporting entity or owns or controls at least 25 percent of the entity interest; and (ii) every individual who acts as an agent on behalf of the entity.
The CTA came into effect on January 1, 2024. For entities formed or registered prior to that date, the initial Beneficial Ownership Information ("BOI") report must be filed by January 1, 2025. If an entity is formed or registered in the United States between January 1, 2024, and December 31, 2024, it has 90 calendar days from the date of formation or registration to submit its initial BOI report. For entities formed or registered on or after January 1, 2025, the deadline for filing the initial BOI report is 30 calendar days from the date of formation or registration. If you need assistance with filing a BOI report, we are available to help. For more information and reporting, please visit https://www.fincen.gov/boi .
How do these changes affect existing Hopkins & Carley estate planning documents?
Clients may wish to consider updating their current estate planning documents to reflect changes in the law. For example, by utilizing the portability rules, many married couples can simplify the administration of their revocable living trust after the first spouse's death. Also, it is imperative that estate plans designed to allocate or distribute amounts based on the available estate tax exemption and/or GST exemption be reviewed to ensure that the new, higher exemption levels are consistent with the original objectives of the plan.
We typically recommend a review of estate planning documents with one of our attorneys every two or three years. Reasons that clients may need modify their plan include:
- An increase or decrease in the size of their estate;
- Acquisitions of major assets including out of state real property and life insurance;
- Changes in marital status of clients or their children (marriage, divorce or separation);
- Additions to their family through birth, adoption or marriage; or
- New thoughts about who should administer funds for their heirs, or how and when their heirs should receive their estate.
Other Hopkins & Carley News
Our Family Wealth and Tax Planning (FWTP) Group has added three attorneys to make us the largest Trust & Estate practice in Northern California:
Suzanne K. Farley is Of Counsel in the FWTP Group, based in our San Francisco and Redwood City office. Prior to joining Hopkins & Carley, Suzanne was a partner at Thompson, Welch, Soroko & Gilbert, LLP, and previously was with Arnold & Porter and Venable LLP in San Francisco.
Joanne J. Lue is an associate in the FWTP Group, based in our Redwood City office. Prior to joining Hopkins & Carley, Joanne was with Thompson, Welch, Soroko & Gilbert, LLP, as well as Venable LLP in San Francisco.
Jill K. Ernst is an associate in the FWTP Group. Prior to joining Hopkins & Carley, Jill was also with Thompson, Welch, Soroko & Gilbert, LLP and previously was with GVM Law LLP in the Sacramento area.
As always, we look forward to assisting you and your family with your estate planning needs. If you have any questions or would like to discuss any of the above issues in more detail, please feel free to contact any one of our FWTP attorneys listed below:
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
