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2023 Estate Planning Update | Chicago Popular

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This alert from Verrill’s Private Clients & Fiduciary Services Group highlights the latest changes to the income tax and transfer tax landscape. The alert addresses the SECURE ACT 2.0, federal and state transfer tax updates for 2023, federal income tax updates for 2023 and the Massachusetts Millionaire’s Tax.

SECURE ACT 2.0

What you need to know: On December 29, 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 into law as part of the 2023 Consolidated Appropriations Act. The SECURE Act 2.0 builds on the SECURE Act, which went into effect January 1, 2020 and significantly changed withdrawal requirements for inherited retirement accounts. Key provisions of the SECURE Act 2.0, which went into effect on January 1, 2023, include modifications to the required minimum distribution and catch-up contribution rules, thereby providing taxpayers with additional opportunities to save for retirement.

Required Minimum Distributions: The SECURE Act 2.0 increases the age at which an account owner must begin taking required minimum distributions (“RMDs”) from their own retirement plans (including 401(k) plans and traditional IRAs) from age 72 to age 73. In 2033, the age at which RMDs must be taken will increase again to 75. However, individuals who turned 72 in 2022 or earlier must continue to take their RMDs as initially scheduled. Note: There are no required distributions from one’s own Roth IRA.

The SECURE Act 2.0 also reduces the penalty imposed for failing to withdraw the full RMD amount from 50% of the shortfall to 25%. Account owners now have the opportunity to further reduce the penalty to 10% of the shortfall if they withdraw the RMD amount and submit a corrected tax return in a timely manner.

Finally, beginning in 2024, Roth 401(k) plans will be exempt from RMDs in the same way that Roth IRAs have been.

Catch-Up Contributions: Under the SECURE Act, individuals over the age of 50 may make annual “catch-up contributions” to their 401(k), 403(b), 457(b) and SARSEP accounts but are limited to $7,500 in catch-up contributions for 2023. The limit for traditional or Roth IRA accounts is $1,000. The SECURE Act 2.0 enhances the current catch-up contribution scheme by permitting account owners to make additional contributions to retirement accounts later in life. Beginning in 2025, for individuals between the ages of 60 and 63, the catch-up contribution limit will be increased to the greater of (1) $10,000 or (2) 150% of the catch-up contribution limit in effect for 2024. These numbers will be indexed for inflation, as will the $1,000 per year limit on catch-up contributions to IRAs.

One other change to note is that beginning in 2024, catch-up contributions made to 401(k), 403(b), and 457(b) plans by employees whose wages exceed $145,000 per year, indexed for inflation, must be made from after-tax earnings.

Other Important SECURE Act 2.0 provisions:

  • 529 Plan Rollover: Beginning in 2024, the SECURE Act 2.0 will allow for college savings plan (529 account) assets to be rolled over into a Roth IRA, provided that the 529 account has been open for at least 15 years. The rollover is capped at $35,000 over the course of the 529 account beneficiary’s lifetime, but this is a significant planning opportunity for owners of 529 plans with beneficiaries who will not use the full balance of the plan on qualified educational expenses.
  • Qualified Charitable Distributions: A qualified charitable distribution (“QCD”) is a withdrawal from an IRA paid directly to a qualified charitable organization. IRA owners aged 70 ½ and older may transfer up to $100,000 to charity each year. The SECURE Act 2.0 expands IRA owners’ options with respect to charitable giving. Individuals aged 70 ½ and older may now make, as part of their QCD limit, a one-time gift of up to $50,000 from an IRA to a charitable organization through a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust, provided that the income interest is retained by the taxpayer, the taxpayer’s spouse or both parties. Additionally, in 2024, the $100,000 limit on QCDs will begin to be indexed for inflation. Note: QCDs can count towards a taxpayer’s RMD.
  • Emergency Withdrawals: Beginning in 2024, individuals will be permitted to withdraw up to $1,000 from their retirement account per year without incurring the standard 10% penalty if such withdrawal is in response to an unforeseeable or immediate personal or family emergency. The amount of the withdrawal must be repaid in full within three years, and no further emergency withdrawals may be made until repayment.
  • Small Business Credit: To make it easier for small businesses to provide retirement benefits to employees, the SECURE Act 2.0 increases the tax credit in connection with 401(k) plan startup costs from 50% of such costs to 100% of the costs for employers with 50 or fewer employees. An additional credit in the form of a percentage of the amount contributed by the employer on behalf of the employee is granted as well, up to a cap of $1,000 per employee. The full credit is limited to employers with 50 or fewer employees. Employers with 51 to 100 employees will see their tax credits phase out.
  • Changes for New/Young Workers: The SECURE Act 2.0 also introduces several provisions designed to aid individuals new to the work force with their retirement planning, including (1) allowing employers to match employee student loan payments by contributing to an employee’s retirement account, and (2) requiring employers with new 401(k) and 403(b) plans to automatically enroll eligible employees beginning in 2025.

If you have named your revocable trust as a beneficiary of your retirement account and have not updated the trust instrument since 2019, or if you have questions about the SECURE Act 2.0, please contact a member of Verrill’s Private Clients & Fiduciary Services Group.


Federal and State Tax Update

Federal Transfer Taxes

Federal unified gift and estate tax exemption increased to $12,920,000: As of January 1, 2023, an individual may give up to $12,920,000 (increased from $12,060,000 in 2022) during life or at death without incurring any federal gift or estate tax. Married couples may give up to $25,840,000 (increased from $24,120,000 in 2022). Federal estate and gift tax are assessed at a maximum rate of 40%.

Absent further action from Congress, the unified gift and estate tax exemption amount is set to be reduced back to approximately $5,000,000 per individual (adjusted upwards for inflation) in 2026. However, in 2019, the Internal Revenue Service issued final Regulations to protect taxpayers who make large gifts during the interim period where the higher exemption amount applies. In the event of a decrease in the unified exemption, taxpayers dying in 2026 and beyond will not face a tax liability for lifetime gifts that were exempt from tax when made due to the increased exemption amount available from 2018-2025.

Planning Opportunity: Clients may consider making lifetime gifts to lock in use of the current large exemption amount. Gifts may be made outright, to an irrevocable trust, or may take other forms, such as the forgiveness of intra-family loans. Note that gifts of high-basis assets are optimal, because the recipient of a lifetime-gift takes the donor’s cost basis for capital gain purposes, while the recipient of a gift from a decedent’s estate receives a new cost basis equal to fair market value as finally determined for federal estate tax purposes.

GST tax exemption increased to $12,920,000: As of January 1, 2023, an individual may transfer up to $12,920,000 (increased from $12,060,000 in 2022) during life or at death without triggering the generation-skipping transfer (GST) tax. Married couples may give up to $25,840,000 (increased from $24,120,000 in 2022). The GST tax is an additional, flat tax assessed at the highest applicable federal estate tax rate (currently 40%) on transfers to persons two or more generations below the donor (i.e., to grandchildren or more remote descendants). As with the unified gift and estate tax exemption, the GST tax exemption amount is set to be reduced back to approximately $5,000,000 (adjusted for inflation) in 2026.

Planning Consideration: Clients whose existing estate plans tie distributions upon death to the amount of estate tax or GST tax exemption available at the time of the donor’s death may now wish to review such plans to avoid unintended results. For example, a plan that provides that all GST-exempt property be distributed outright or in trust for grandchildren may result in a larger-than-intended distribution to the donor’s grandchildren in 2023, or a smaller-than-intended distribution to the donor’s children in 2026.

Gift tax annual exclusion increased to $17,000: In 2023, an individual donor may make annual gifts of up to $17,000 per recipient (increased from $16,000 in 2022) without incurring gift or GST tax, and without using any of the donor’s federal unified gift and estate tax exemption or GST tax exemption. Married couples may make annual exclusion gifts in 2023 of up to $34,000 per recipient, treating gifts made to third parties as if one half had been made by each spouse if the spouses file a federal gift tax return to elect “gift splitting.” Note: Gifts to pay tuition and/or medical expenses (paid directly to the educational institution or medical care provider) are gift tax free and may be made, in unlimited amounts, in addition to gifts qualifying for the annual exclusion.

Annual exclusion for gifts to noncitizen spouse increasing to $175,000: The annual exclusion for gifts made in 2023 to a spouse who is not a United States Citizen will be $175,000 (increased from $164,000 in 2022).


Federal Income Taxes

2023 Income Tax Brackets

Increase in Standard Deduction: For taxable years beginning in 2023, the standard deduction has been increased to $13,850 for individuals, and $27,700 for married couples filing jointly. Deductions for state and local taxes (SALT) remain capped at $10,000.

Higher Contribution Limits for Retirement Plans, Health Savings Accounts and Flexible Spending Accounts: In addition to changes brought by the SECURE Act 2.0, the IRS has announced that in 2023, employees’ contribution limits will increase as follows:

  • Contribution limits for 401(k), 403(b) and 457 plans and Thrifts Savings Plans increase to $22,500 for employees under age 50 and $30,000 for employees aged 50 and older. Note: For employees whose employer offers a 401(k) match, the employer’s contribution will not count toward the limit.
  • IRA contribution limits increase to $6,500 (from $6,000 in 2022). As noted above, under the SECURE Act 2.0, the IRA catch-up contribution limit for individuals aged 50 and older is $1,000 in 2023, bringing the total contribution limit to $7,500 for those aged 50 and older.
  • A health savings account (“HSA”) enables an employee to set aside pre-tax funds for medical expenses. HSA contribution limits increase to $3,850 for self-only coverage and $7,750 for family coverage.
  • A flexible spending account (“FSA”) is another mechanism to set aside pre-tax funds for medical costs. FSA contribution limits increase to $3,050. Note: While HSA funds never expire, FSA balances typically expire at the end of the year.

State Income Taxes

Massachusetts Millionaire’s Tax: On November 8, 2022, Massachusetts voters approved a constitutional amendment known as the “Fair Share Amendment” or the “Millionaire’s Tax.” The Fair Share Amendment went into effect on January 1, 2023 and levies a 4% surtax on taxable income in excess of $1 million. The $1 million threshold will be adjusted annually for inflation. As a result, taxpayers earning over $1 million will see a tax rate increase from 5% to 9% on wages, long-term capital gains, interest and dividends, and an increase from 12% to 16% on short-term capital gains and long-term gains on collectibles. The surtax applies to both high-income taxpayers who annually report more than $1 million of income, and to taxpayers who have a significant and infrequent taxable event, such as the sale of a home or business.

Planning Consideration: Those affected by the new Millionaire’s Tax may consider the following strategies to mitigate the impact of the surtax:

  • File Separate Massachusetts Income Tax Returns: If both spouses have sufficiently high income, the couple may wish to file separate Massachusetts income tax returns while still filing a joint federal return. Filing separate Massachusetts returns should effectively shelter $1 million of income per spouse from the 4% surtax.
  • Move to Another State: Changing domicile from Massachusetts to another state can eliminate Massachusetts income tax except for tax on Massachusetts source income, i.e., income derived from Massachusetts real property or income from a Massachusetts-based business.
  • Spread Out Income Over Years: Careful income tax planning may allow a Massachusetts taxpayer to spread income across multiple tax years to ensure that annual taxable income is below $1 million. For example, an owner looking to sell an asset with significant unrealized appreciation could structure the transaction as an installment sale so that the gain could be spread out over several years, avoiding the $1 million threshold in any one taxable year.
  • Transfer Assets to a Non-Grantor, Non-Resident Trust: An irrevocable trust is generally subject to Massachusetts income tax if both of the following two tests are met: (1) the donor is currently a Massachusetts resident or was a Massachusetts resident on the date on which the trust was executed or died a Massachusetts resident; and (2) one or more of the trustees is a Massachusetts resident. Taxpayers domiciled in Massachusetts may reduce Massachusetts income tax by establishing and funding a non-grantor, non-resident trust. The trust should have no Massachusetts resident trustees, should be a separate entity for tax purposes, and should be a tax resident of a state that will not impose a state income tax. Such a trust will be considered a non-resident trust for income tax purposes, and, if structured properly, with the exception of Massachusetts source income, no Massachusetts income tax will be assessed.
  • Establish a Charitable Remainder Trust: If charitably inclined, consider establishing a charitable remainder trust (“CRT”). A CRT is a tax-exempt irrevocable trust. The donor transfers assets to the CRT and the trustee distributes income out to the donor (or to another named beneficiary) for the donor’s lifetime or a term of years not to exceed 20 years. At the end of the payment term, any remaining trust property is distributed to one or more named charitable organizations. The donor may take an income tax charitable deduction, and the assets transferred to charity pass free of estate taxes. Further, if the donor funds the CRT with highly appreciated assets and the trustee subsequently sells those assets, the donor will avoid tax on any capital gains (now 9% on long term capital gains in excess of $1 million and 16% on short term capital gains in excess of $1 million).

State Transfer Taxes


Connecticut increases gift and estate tax exemption to match the federal exemption of $12,920,000: The Connecticut gift and estate tax exemption has increased to the federal exemption amount of $12,920,000 for 2023. Also, beginning in 2023, the estate tax rate is set at a flat 12% of the value of the taxable estate or gift above the federal exemption amount. By conforming Connecticut’s exemption to the federal exemption amount, the Connecticut Legislature created the possibility that the Connecticut exemption will decrease if the federal exemption decreases, which it is scheduled to do under current law on January 1, 2026.

Connecticut remains the only state in the nation that assesses a state gift tax. Connecticut does provide a gift tax annual exclusion similar to the federal annual exclusion. In 2023 an individual donor may make annual gifts of up to $17,000 per recipient without incurring Connecticut gift tax. Married couples may make annual gifts of up to $34,000 per recipient without incurring such tax.

Maine estate tax exemption increases to $6,410,000 for 2023: Maine’s estate tax rates range from 8% to 12%, with no tax on the first $6,410,000 for 2023 (increased from $6,010,000 in 2022). The top rate applies for estates in excess of $12,410,000.

Massachusetts estate tax exclusion remains at $1,000,000: The Massachusetts estate tax system is complex, with an exclusion, not an exemption, of $1,000,000. Estates of $1,000,000 or less owe no Massachusetts estate taxes. Estates of more than $1,000,000 owe estate taxes on the entirety of the estate – the first $1,000,000 is not exempted, creating a “tax cliff.” The Massachusetts estate tax marginal rates range from 5.6% to 16%. The top rate applies to estates in excess of $10,040,000.

New York estate tax exclusion increases to $6,580,000: The New York estate tax exclusion has increased to $6,580,000 for 2023 (up from $6,110,000 for 2022). For estates valued less than $6,580,000, no tax is owed. For estates valued between $6,580,000 and $6,909,000, New York estate tax is owed on the amount in excess of $6,580,000. Estates valued more than 5% of the exclusion amount (i.e., for 2023, estates exceeding $6,909,000) are taxed on the full value of the estate, creating a “tax cliff.” New York’s estate tax rates range from 3.06% to 16%. The top rate applies to estates in excess of $10,100,000.

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Written by Natalia Chi

Chicago Popular; Chicago breaking news, weather and live video. Covering local politics, health, traffic and sports for Chicago, the suburbs and northwest Indiana.

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