If you recently attended a party with a White Elephant gift game, or if your child has ever received a gift of a musical instrument, you understand and appreciate the fine art of re-gifting. In our family, certain family members have been known to repay the kindness of a Christmas gift by inconspicuously re-gifting the item into the vehicle of an unsuspecting sibling, only to be discovered a few days later and after a multi-state drive home. Merry Christmas brother!
In honor of the spirit of re-gifting, in this month’s update, I first summarize 2023 tax amounts relevant to estate planning decisions, and then summarize two re-gifting case studies.
Relevant 2023 Tax Amounts:
Looking ahead to 2023, here are the relevant estate planning thresholds for Minnesotans:
- Annual Exclusion Amounts: The federal “annual exclusion” amount will increase from $16,000 per beneficiary per year in 2022 to $17,000 per beneficiary per year in 2023. Married couples can therefore “double up” their gifts to make combined annual exclusion gifts of $34,000 per beneficiary per year without having the gift being characterized as a “taxable” gift.
- Federal Estate & Gift Taxes. The federal unified credit against estate and gift taxes increases from $12.06 million in 2022 to $12.92 million in 2023. In total, a married couple could transfer up to $25.84 million free of federal gift and estate taxes.
- Minnesota Estate Taxes. The Minnesota estate tax exemption will remain at $3.0 million per person into 2023. Earlier this year, legislation was proposed that would allow a surviving spouse to “port” a deceased spouse’s unused Minnesota estate tax exemption to the surviving spouse for subsequent use by the surviving spouse. Until that legislation is enacted, however, married Minnesota residents with at least $3.0 million in assets should continue to make use of a family trust structure.
- Minnesota Gift Taxes. Minnesota has no gift tax. As a result, Minnesota residents should continue to consider lifetime gifts. If a Minnesota resident makes a gift of more than the annual exclusion amount and lives at least three years past the date of this gift, the value of this gift is not taken into account in calculating a Minnesota estate tax liability.*
In honor of the spirit of re-gifting, consider the following two case studies:
Gift Trusts for Children and Grandchildren. Dad dies with a substantial investment portfolio of highly appreciated securities. The family receives a step-up in cost basis on the appreciated securities. A Family Trust structure is implemented with $3.0 million of stepped-up securities, with Mom receiving the balance. Mom then re-gifts these securities to irrevocable “gift trusts” for the benefit of their three adult children. The following benefits apply:
- If Mom survives the three year-period commencing on the date of the gifts, the assets contributed to the gift trusts are not subject to Minnesota estate taxes.
- Regardless of Mom’s longevity, the assets contributed to the gift trusts are available for the needs of each named child and the child’s family through discretionary distributions.
- At the child’s death, the remaining assets in the child’s gift trust pass free of estate taxes.
- In this case, Mom elected to make the gift trust as an “intentionally defective trust” for income tax planning purposes, meaning that Mom is responsible for all taxable events for assets owned by the gift trust. This structure allows the gift trust assets to appreciate without reductions for income tax payments.
Multiple Generation Charitable Planning. During Mom’s lifetime, Mom and Daughter had discussed a charitable giving strategy, but it was never implemented. Following Mom’s death, Daughter decides to implement the charitable legacy of her Mom by re-gifting an inherited retirement account to their favorite charity over a period of years. Since Daughter is considered the owner of the inherited IRA, Daughter will be required to withdraw the entire balance of the inherited IRA by the 10th anniversary of Mom’s death. Daughter will then make corresponding charitable contributions to the charity, and also names the charity as the 100% primary beneficiary of the inherited IRA. Through this re-gifting strategy, Daughter honors Mom’s charitable planning legacy.
We are honored to represent beneficiaries with post-death administration strategies, including those that might include options for “re-gifting” assets following death. On behalf of my colleagues at Veritage Law Group, we want to wish you and your family a Merry Christmas, and best wishes for a Happy New Year ahead.