For persons making lifetime gifts or pass-away in 2024 the applicable tax rate is 40% of one’s lifetime gifts and testamentary estates that collectively exceed $ 13,610,000 (the gift/estate tax “exemption”).  Barring legislative action, the existing exemption will sunset (expire) at the end of 2025 and thereby substantially decrease. The expected reduced exemption will be $5,000,000 adjusted for inflation.

Since both lifetime gift taxes and estate taxes share the same tax credit, strategic and mindful consideration should be devoted to preserving the currently elevated exemption. Making meaningful lifetime gifts, outright or in trust, before the impending reduction at the end of next year can safeguard against adverse tax implications.

Timely gift planning is essential. The advantage of appropriate lifetime gifting before the sunset takes place is realized to the extent that the lifetime gifts exceed the adjusted sunset amount. If not timely exercised the valuable difference between the current higher exemption amount and the post-2025 reduced amount will be forfeited.

By not acting in a well-timed and appropriate manner, the potential gift and estate tax exposure may mean a taxpayer could owe more than $2,400,000 in gift or estate taxes. Thus, determine whether you are in a position to qualify for this currently extraordinarily favorable treatment and if so, formulate and implement a timely and proper plan.

Tax laws surrounding inherited IRAs are complicated. They became more so with the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, and then the SECURE 2.0 Act which passed on December 29, 2022.

The passage of the SECURE Act provides that most non-spouse beneficiaries who inherit IRA assets on or after Jan. 1, 2020, are required to withdraw the full balance of the account within 10 years (the “10-year rule”). This includes adult children and grandchildren and most other designated beneficiaries. This change limits the popular “stretch” IRA tax planning tool, which in the past allowed many inherited IRAs to be distributed over the beneficiary’s lifetime. Now, only select groups, termed “eligible designated beneficiaries,” which include spousal beneficiaries are eligible for more extended deferral periods. Therefore, for most beneficiaries, the 10-year rule is applicable.

Estate planning with IRAs is now based on a case-by-case standard. Some plans implement beneficiary designations in favor of direct individual beneficiaries in lieu of trusts. The analysis of whether to use individuals as beneficiaries versus trusts in terms of estate-planning is highly technical and ought to be considered with great insight.

Ronald Keith Lawn, J.D., LL.M. in Taxation               Stephanie M. LeBlanc, J.D., LL.M. in Taxation

The Internal Revenue Service cautions taxpayers about a new scam involving deceptive notices indicating that the IRS owes the taxpayer a refund.

Taxpayers are receiving a cardboard envelope from a delivery service. There is an enclosed letter that appears to provide the taxpayer with official IRS contact information and a phone number. These malicious letters, however, are not from the IRS. The scam notice states that it is “in relation to your unclaimed refund.”

The letter among other things seeks sensitive personal information from taxpayers including detailed pictures of driver’s licenses and sensitive financial information. The information can be used by identity thieves.

Know that the IRS will never:

1. Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes;
2. Threaten to immediately bring in local police or other law enforcement groups to have the taxpayer arrested for not paying;
3. Demand that taxes be paid without giving taxpayers the opportunity to question or appeal the amount owed; or
4. Call unexpectedly about a tax refund.

If you want to learn more or are concerned about a recent letter you received, please contact your tax accountant or report to the Treasury Inspector General for Tax Administration (TIGTA). You can report IRS scams online or by calling TIGTA at 1-800-366-4484.

The manner in which assets are transferred, either as a lifetime gift or by way of inheritance will affect its income taxable status and basis calculation.

Selling an asset for profit generally exposes the gain realized to income taxation.  In general, the gain is considered to be the increased difference, if any between the original value or cost (with certain adjustments) and the sales price (with certain adjustments).  The adjusted original cost is known as the “cost basis”.

If one gifts an asset to another during their life, the cost basis of the asset in the hands of the recipient is the same as it is in the hands of the donor of the gift. This is referred to as a “carry-over” basis. Upon a sale of the asset by the donee, any income tax exposure from the gain realized upon a sale by the done is the responsibility of the recipient.

On the other hand, under current law the cost basis of an inherited asset is the fair market value of the asset on the date of the decedent’s death.   This is known as the cost basis “step-up” and the recipient enjoys the corresponding income tax advantage.

Therefore, if an asset is sold prior to death, any increase in its value is for the most part taxable income to the seller. On the other hand, if one inherits an asset, the cost basis in the hands of the recipient is the fair market value of the asset, i.e., the stepped-up basis. If the recipient sells the asset assuming no further appreciation takes place after the death of the decedent, then no gain is applicable.

Based on the above analysis, it appears that there is a distinct income tax advantage, generally speaking, to transferring assets at one’s death rather than gifting during one’s life.  However, there are additional important factors that may have meaning otherwise.

First, if one considers that in 2024 the estate tax marginal rate for assets presently valued at over $13,610,000 is 40% and the long-term capital rate may be 20%, then removing assets from one’s estate taxable estate by making lifetime gifts has a clear advantage over income tax savings and should not be overlooked. Additionally, appreciation that takes place after a lifetime gift is made, but before the donor’s death, bypasses the estate taxable estate of the donor.  This concept is referred to as an “estate freeze”.  Estate freeze techniques are equally favorable to lifetime gifts of marketable securities, business interests, and more.

The above discussion is a basic analysis with respect to lifetime gifting versus gifting at death. The purpose of which is to demonstrate in general terms the value of a tax advantageous planning technique.  It is by no means a complete examination of the subject matter. There is a myriad of complex nuances that come into play when designing any estate or gift plan. Therefore, consideration of all of the facts, circumstances, and applicable laws is vital before taking any action.