Year-end brings with it many planning considerations. Here, we outline key opportunities as they relate to gifting, income tax planning, retirement planning, and planning in a high interest rate environment. We also include a year-end punch list for readers based on your goals. If you have any questions about the planning opportunities discussed, your Brown Brothers Harriman wealth planner would be happy to discuss them further.

Year-End Gifting

Gift/Estate Tax Exemption and GST Tax Exemption

This is a popular time of year for many of our clients to make gifts. Each U.S. citizen has a lifetime exemption they can use to shelter transfers from estate and gift tax (both of which are 40%). The exemption, which is adjusted for inflation each year, is $12.92 million per person ($25.84 million for a married couple) this year. In 2024, the exemption is projected to increase to $13.61 million per person ($27.22 million for a married couple). The generation-skipping transfer (GST) tax exemption tracks the gift/estate tax exemption in 2023 and 2024.

Lifetime gifting can be beneficial because it removes all of the future appreciation on the gifted asset out of an estate. The exemption may be used to make outright gifts, fund new trusts, or add to existing trusts, and gifts can be made using cash, securities, or complex assets, such as an interest in a privately held business or family limited partnership. There are also some opportunities to leverage your exemption if you gift an asset that qualifies for valuation discounts, such as interests in privately held businesses or partnership interests, which are often discounted for lack of marketability and/or lack of control.

For those worried about giving away too much, spousal lifetime access trusts (SLATs) are a good option. SLATs have become popular over the past few years due to their flexible terms and the increased transfer tax exemption amounts. SLATs allow a non-grantor spouse to be included as a beneficiary, which acts as a safety net because that beneficiary spouse can access funds later on if necessary.

An important note: The gift and estate tax exemption was doubled back in 2018 with the Tax Cuts and Jobs Act. That legislation was drafted so that the exemptions will automatically decrease in 2026 absent any action from Congress. Those who are interested in making gifts and have the assets to do so are encouraged to do so sooner rather than later should the exemption amounts decrease in 2026.

Annual Exclusion

The annual exclusion is another way to pass on assets and represents the amount that can be gifted to any person once per year without using gift/estate tax exemption. That amount is $17,000 in 2023 ($34,000 for a married couple) per recipient. The annual exclusion is also adjusted for inflation each year, and it will increase to $18,000 in 2024 ($36,000 for a married couple) per recipient.

Annual exclusion gifts can be made outright, to certain types of trusts, to custodial accounts for minors, or to 529 college savings plans, the last of which can be frontloaded with five years’ worth of annual exclusion gifts ($85,000 in 2023, or $170,000 for married couples).

Direct Payment of Tuition and Medical Expenses

Another strategy that does not use any exemption is the direct payment of tuition and medical expenses. These payments do not count as a taxable gift or use any of the exemption amount as long as payment is made directly to the institution. These can be made on anyone’s behalf and are not limited to immediate family members.

Year-End Income Tax Planning

Tax Loss Harvesting

Tax loss harvesting is one income tax planning consideration for year-end. With this approach, investors realize losses in their portfolio to offset capital gains. It can be useful even in cases where there are no gains to offset, as losses can be carried forward indefinitely as well as used to offset $3,000 of ordinary income this year.

Roth IRA Conversion

Another useful planning technique is the Roth IRA conversion. For those with a traditional or employer-sponsored IRA, it may be a good time to consider transitioning to a Roth IRA, which has many advantages over other traditional retirement accounts, including no required minimum distributions (RMDs) and tax-free withdrawals.

When converting to a Roth IRA, individuals take a tax-deferred plan and pay the tax on it now instead of later. This is a good opportunity in a down market because the amount subject to tax will be lower since the dollar amount in the account is lower. When the market recovers, the upside will be captured in a tax-free account.

One thing to remember is that the amount converted will be included in taxable ordinary income for the year, so be sure to work with an accountant to understand the tax implications of a conversion and the best timing. An accountant can also help determine some techniques for offsetting the income generated by the conversion, such as charitable deductions.

Charitable Planning

On the topic of charity, year-end is a great time to benefit organizations that are important to you. Charitable gifts can be made using cash, securities, or complex assets. From a tax perspective, gifting appreciated securities is optimal because you avoid paying capital gains on those holdings. Depending on your charitable goals, gifts can be made directly to the charity, using a donor-advised fund (DAF) or private foundation, or through a charitable trust.

An accountant can help you understand the tax deductions you will be eligible for with your charitable gifts. Deduction limits vary based on what you give (cash vs. non-cash assets) and how you give (directly to a charity or through a DAF, for example). Cash gifts made directly to public charities (including DAFs) are deductible against 60% of adjusted gross income (AGI). Gifts of non-cash assets held more than one year are deductible against 30% of AGI.

It also may make sense to group a few years’ worth of contributions into one year to get above the standard deduction amount and fully deduct your contributions, and an accountant can provide guidance around maximizing deductions in cases such as this.

Year-End Retirement Planning

Required Minimum Distributions

There are a few things to keep in mind for retirement planning at year-end. RMDs, which begin at age 73 (except for Roth IRAs), are one consideration. There is a complex set of rules around when distributions from inherited IRAs must be taken out, so beneficiaries should work with their wealth planners for the correct guidance.

RMDs are counted as ordinary income and can push individuals into a higher tax bracket for a particular calendar year. Those who do not need the income may consider making a qualified charitable distribution from their IRA. This allows charitably inclined individuals to direct up to $100,000 from their IRA each year (at age 70.5 and older) to a public charity, reducing the RMD – and thus, taxable income – by that amount.

Contribution Limits

This year, the maximum amount that can be contributed to an employer-sponsored plan is $22,500, with a $7,500 catch-up contribution for those 50 and older. That will increase to $23,000 in 2024, with a $7,500 catch-up contribution for those 50 and older. For IRAs, the contribution limit for 2023 is $6,500, with a $1,000 catch-up contribution for those 50 and older. This will increase to $7,000 in 2024, with a $1,000 catch-up contribution for those 50 and older. The deadline for 2023 IRA contributions is April 15, 2024.

Planning in a High Interest Rate Environment

Inflation and rising interest rates affect so many aspects of our lives – groceries, mortgages, business loans, and so forth – and we often forget that they affect our estate planning strategies as well. When the Federal Reserve increases the fed funds rate, there are usually increases to other rates, including the applicable federal rates (AFRs) and the 7520 rate (GRAT hurdle rate), both of which are used for estate planning mechanisms that we focus on.

The nearby tables provide context for how much these have changed over the past two years. While the movement over the last 12 months is less drastic than that between 2021 and 2022, it’s still trending upward.

In an environment where these rates continue to rise, we look for silver linings. Interest rate changes are particularly relevant for estate planning techniques that involve split gifts, like those made to qualified personal residence trusts (QPRTs), charitable remainder trusts (CRTs), and grantor retained annuity trusts (GRATs), as well as for more standard transactions like intra-family loans.

The popularity of split gifts in these environments is due to the way a gift’s value is calculated, which is by taking the fair market value and subtracting the retained interest. In situations where there is a high interest rate, the value of the taxable gift is reduced. If the taxable gift is lower, less exemption is used to make that gift.

QPRTs and CRTs

Let’s dive into two of our favorite techniques for this environment as examples: QPRTs and CRTs. With QPRTs, you transfer your home into a trust, retain the right to live in it for a specified period of time, and then gift that property to designated beneficiaries (usually children/family members). Each piece of that split-interest gift is valued at the time the transfer is made. A higher interest rate means the value of the retained interest to live in the home is higher, which means that by default, the value of the remaining interest, or taxable gift, is lower. This is a nice way to keep a home in the family for generations.

With CRTs, you establish an income stream to a beneficiary for a defined period, followed by a gift to charity. The charitable deduction – the second part of the gift – is for the present value of the remainder interest passing to charity, meaning that the higher the interest rates, the higher the charitable deduction, which is positive for income tax purposes. It’s best to use low-basis assets with CRTs because you won’t recognize gain on the contribution, but the full fair market value will be used to compute the value of the income interest and the charitable deduction.

Intra-Family Loans and GRATs

Other useful strategies in rising rate environments include intra-family loans and GRATs. These are slightly less appealing than they were two years ago given the rise in rates. With intra-family loans, you make a loan to a family member at rates set forth by the IRS. While AFRs are high, they’re still lower than the average mortgage rate, for example, so if you have a family member who needs liquidity, this could be a good option.

GRATs are used to transfer appreciation in assets to named beneficiaries without the imposition of gift tax. They are particularly relevant for those who have used up their exemption and are looking to transfer more wealth out of their estates. You transfer an asset into a GRAT, and to the extent that asset appreciates in value over the hurdle rate, that appreciation passes to your beneficiaries.

Year-End Tax and Estate Planning Punchlist