Why 2023 Is a Good Time to Reduce Future Estate Taxes

While no federal tax legislation will likely be enacted this year, “there are a variety of methods” advisors can use to help clients take advantage of the “historically high” estate tax exemption, according to Andrew Katzenberg, a partner for ArentFox Schiff’s offices in New York City and Washington.

The latest move regarding the estate tax came from Rep. Bob Latta, R-Ohio, when he reintroduced on Jan. 13 legislation to permanently repeal the estate tax and retain the stepped-up basis at death.

“It’s unlikely this legislation will pass either both [chambers] of Congress or a presidential veto,” Katzenberg said. “The exemption currently stands at $12,920,000 per person [for 2023], so a couple would have almost a $26M exemption. This makes any type of repeal hard to sell as necessary to the general public or a majority of Congress.”

Various states have also proposed bills that seek to lower estate tax thresholds and raise taxes on the wealthy.

We caught up with Katzenberg — who focuses on wealth transfer planning and preservation, multigenerational planning, estate and trust administration, nonprofit and tax-exempt organizations, and charitable giving — to discuss what advisors should watch out for this year.

His clients include high-net-worth individuals, hedge fund and private equity managers, business owners, art dealers and athletes.

THINKADVISOR: What is the No. 1 estate planning issue advisors should prepare for this year?

ANDREW KATZENBERG: Since the Republicans took control of the House, it is unlikely there will be any tax legislation affecting clients in 2023. However, the economic downtown may make clients very concerned about their current positions and reluctant to do more planning.

Helping clients see the forest through the trees here will be very important for advisors as this is actually an opportunity to move assets with lower values outside their taxable estates.

The basic idea [of] buy low sell high … applies to estate planning when using your exemption. You want to use assets with lower values and high growth potential to maximize the exemption you use. Using an asset with a deflated value (but expectation of rising back up again) is an excellent strategy.

What’s new or upcoming regarding the estate tax?

Unless Congress intervenes, the current historically high estate exemption limit of $12,920,000 (as of 2023, adjusted for inflation yearly) is set to be cut in half beginning in 2026.

Clients with the means should use all of this exemption as soon as possible, or at least an amount greater than half the current exemption in order to benefit from it.

Although I do not expect Congress to address this until 2025, after the 2024 election, gifting earlier also allows for the appreciation on the gifts to be removed from one’s estate. There are a variety of methods clients can use to utilize the exemption from outright gifting to creating irrevocable trusts to receive gifts.

Additionally, depending on one’s wealth, there are techniques that can be coupled together to increase the actual exemption limit. As to which method is right for a client depends on their specific facts and circumstances, which is the job of counsel to help guide clients to the appropriate solution that fits.

Are you watching any legislation?

The Accelerating Charitable Efforts (ACE) Act, which was not passed last year, is something to watch out for in the future.

This act was aimed at donor-advised funds and private foundations in order to guarantee [that] charitable dollars actually make it to charities.

Whether or not all or part of this legislation is brought back up in 2023 is certainly possible. There has been fairly strong interest in increasing the rules and regulations particularly when it comes to donor-advised funds.

Pictured: Andrew Katzenberg