January 29, 2023

Volume XIII, Number 29


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January 26, 2023

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2013 Year-End Estate Planning and Review

After several years of significant change, 2013 will end with relative certainty related to estate tax laws.  However, this does not remove the need for careful year-end planning.  Higher marginal income tax rates for ordinary income, capital gains and dividends – coupled with the imposition of the new (and complicated) 3.8% surtax on net investment income for higher-income individuals – can create new challenges and opportunities. A few simple actions may result in savings if taken before year-end.

Transfer Tax Exemption and GST Exemption  

At the beginning of the year, Congress enacted legislation that “made permanent” the exemption amount that individuals may transfer by gift and/or at death without being subject to federal transfer taxes.  Notably, the legislation includes an annual inflation adjustment for the federal exemption amount and a maximum tax rate of 40%.  The inflation-adjusted federal exemption amount is $5,250,000 for 2013, and will be increasing to $5,340,000 in 2014.  In contrast, Illinois has established its exemption amount at $4,000,000 for state estate tax purposes – which amount is not adjusted for inflation.  The rates of Illinois estate tax on Illinois estates range from 8% to 16%. Illinois also allows a marital deduction for state transfer tax purposes for assets passing in qualifying trusts for the benefit of a surviving spouse (including trusts for which a similar federal marital deduction is not elected).

In order to ensure a death tax at each successive generational level, a generation-skipping transfer (“GST”) tax – equal to the highest estate tax rate – is imposed on transfers to grandchildren or more remote descendants.  However, every taxpayer is also given a separate federal GST exemption equal to the federal transfer tax exemption (i.e., $5,250,000 in 2013 and $5,340,000 in 2014), although the federal GST exemption is applied separate and apart from the federal transfer tax

Annual Exclusion Gifts

Making use of your annual exclusion gifts remains one of the most powerful – and simplest –estate planning techniques. For 2013 (and 2014), individuals can make an unlimited number of gifts of up to $14,000 per recipient, per year.  Over a period of time, this approach can result in substantial transfer tax savings, as both the gift itself and its income and growth are removed from the donor’s estate. This strategy also allows an individual to avoid paying gift tax or using any transfer tax exemption.  However, an individual cannot carry-over unused annual exclusions from one year to the next.  If such exclusions are not utilized by the end of the year, the exclusions for that year are lost. Additionally, these transfers may save family income taxes where income-earning property is transferred to family members in lower income tax brackets (who are not subject to the “kiddie tax”.)

Tuition and Medical Gifts

Individuals can still make unlimited gifts on behalf of others by paying their tuition costs directly to the school or their medical expenses directly to the health care provider (including the payment of health insurance premiums).

Lifetime Utilization of New Transfer Tax Exemption

The ability to transfer $5.25 million ($10.5 million per married couple) – after annual exclusion and medical and tuition gifts, and without having to pay gift taxes – paves the way for many planning opportunities.  When combined with valuation discounts and leveraging strategies (e.g., family partnerships, sales to grantor trusts, GRATs, etc.), tremendous amounts of wealth may pass for the benefit of many generations free of federal and Illinois transfer taxes.  Lifetime gifts utilizing the exemption amounts will almost always result in overall transfer tax savings (unless the assets which have been transferred decline in value). The main reason is the removal of the income and growth on the gifted assets from the taxable estate.  For individuals who fully used their transfer tax exemptions in prior years, consideration should be given to making gifts of the additional inflation adjusted amount (i.e., the increase of $120,000 in the transfer tax exemption from 2012 to 2013, and the additional increase of $90,000 in such exemption from 2013 to 2014).

Benefits of Acting Early. The main benefit of making gifts that utilize the transfer tax exemption is to remove from the taxable estate the income and appreciation on those assets from the date of the gift to the date of death. The sooner the gifts are made, the more likely that additional income and growth on such assets will escape taxation.

Gifts in Trust. Despite the tax savings, many individuals are uneasy about making outright gifts to their descendants. Such concerns are usually addressed by structuring the gifts in trust, which allows the donor to determine how the assets will be used and when the descendants will receive the funds. The use of gift trusts can also provide the beneficiaries with a level of creditor protection (including protection from a divorcing spouse) and additional transfer tax leverage. This is particularly effective when coupled with applying GST exemption to the trust (discussed above) and making the trust a “grantor trust” for income tax purposes (discussed below).

Many individuals may not be comfortable giving away significant amounts of wealth.  However, the gift trust technique is not limited to trusts for descendants, but may also include a spouse as a beneficiary (or the sole beneficiary).  Making the spouse a beneficiary of a gift trust (generally referred to as a spousal lifetime access trust, or “SLAT”) provides indirect access to the trust assets, while allowing the income and growth to accumulate in the trust (if not otherwise needed), and pass free of estate and gift taxes. 

Significant additional transfer tax benefits can be obtained by structuring a gift trust as a “grantor trust” for income tax purposes.  The creator (or “grantor”) of a “grantor trust” is required to report and pay the tax on the income earned by the trust.  This allows the grantor to pass additional funds to the trust beneficiaries free of gift and estate taxes and income taxes, as the grantor’s payment of the trust’s income taxes each year would be considered his or her legal obligation and would not be considered additional gifts.

Taxable Gifts

Although individuals generally dislike paying taxes, making taxable gifts and paying a gift tax may prove to be beneficial based on the differing manner in which the gift and estate taxes are computed and paid – depending on the specific circumstances.

Making Use of the Economy

Assets with values that are temporarily depressed due to current economic conditions – but are expected to recover – are best suited for gifting strategies.  The current (and historically low) interest rates continue to create an environment ripe for estate planning and transferring wealth to descendants on a tax-advantaged basis.  Techniques such as grantor retained annuity trusts (“GRATs”), charitable lead trusts (“CLTs”), intra-family loans, and sales to “grantor trusts” are sensitive to interest rate changes – and are very beneficial in a low interest rate environment.

Illinois QTIP

Given the disparity between the $5.25 million federal estate tax exemption and the $4 million Illinois estate tax exemption, married couples domiciled in Illinois should make certain that their estate plans are structured to take advantage of the Illinois QTIP marital deduction.  Otherwise, an estate plan that is designed to fully utilize the federal $5.25 million exemption can inadvertently cause a $357,143 Illinois estate tax upon the death of the first spouse to die.

New Medicare Taxes

Individuals who are in high income tax brackets must be cognizant of the new taxes imposed by the Affordable Care Act.  In short, a 3.8% surtax is imposed on net investment income, and an additional 0.9% Medicare (hospital insurance, or “HI”) tax is imposed on wages.  While the 0.9% additional tax on wages is only imposed on individuals, the 3.8% tax on net investment income is imposed on individuals, estates and trusts.  Individuals are only subject to this new 3.8% Medicare tax if their “modified adjusted gross income” exceeds $250,000 for joint filers ($125,000 for a married individual filing a separate return) and $200,000 for single individuals, in 2013 trusts and estates are subject to this tax at a $11,950 threshold ($12,150 for 2014).  The approach to minimizing or eliminating the 3.8% surtax depends on each taxpayer’s individual situation.  Some taxpayers should consider ways to minimize (e.g., through deferral) additional net investment income for the balance of the year, while others should review whether they can reduce modified adjusted gross income other than unearned income.  In contrast, others may want to accelerate net investment income and/or modified adjusted gross income that would be received next year so that it is included this year (reducing the tax next year).  Year-end planning (such as timing the receipt of net investment income, the receipt of modified adjusted gross income and the payment of deductible expenses) can save significant taxes.

Charitable IRA

The popular provision allowing tax-free distributions to a public charity from an IRA (called a “charitable rollover”) is in effect for 2013.  The charitable IRA rollover is a special provision allowing donors who are 70½ or older to exclude from taxable income – and count toward their required minimum distribution – certain transfers of IRA assets that are made directly to a public charity (but not a donor advised fund or a private foundation).  If you are 70½ or older and are thinking of making a charitable gift, consider arranging for the gift to be made directly to a public charity by the trustee of your IRA.  Such a transfer, if made before year-end, can achieve tax savings.


In June of this year, the Supreme Court of the United States issued its groundbreaking opinion in United States v. Windsor regarding marriage between same-sex couples.  Additionally, Governor Pat Quinn signed legislation recognizing same-sex marriage in Illinois on November 20, 2013 – with the law to take effect on June 1, 2014.  These events significantly impact estate planning for same-sex couples living in Illinois and other jurisdictions that recognize same-sex marriage.

This is an opportune time for same-sex couples to review their estate plans to ensure that they are appropriately structured.  Many same-sex couples may now wish to marry.  As a result of these events, couples currently residing in Illinois and several other states will be eligible for, and subject to, a myriad of spousal rights and responsibilities afforded under federal and Illinois law – including the ability to transfer unlimited assets to a spouse during life and at death pursuant by use of the marital deduction.  This now allows married same-sex couples to defer payment of any estate tax until the death of the surviving spouse.                                  

Regardless of legal status, same-sex couples should review their estate plans to make certain that they are structured optimally in light of these recent events.  For instance, such couples may now want to marry and include provisions in their estate planning documents taking advantage of the estate tax marital deduction.  Additionally, married same-sex couples may wish to simplify their plans by relying on the concept of “portability” – which allows a surviving spouse to utilize any unused estate tax exemption of his or her predeceased spouse.

Just as with opposite sex marriages, same-sex couples who plan to marry should be aware of the financial ramifications of marriage and consider entering into a pre-marital agreement to establish the rights and obligations of each party.

© 2023 Much Shelist, P.C.National Law Review, Volume III, Number 337

About this Author

Gregg M. Simon Succession Planning Attorney Much Shelist

Gregg is a respected authority on estate and trust matters with more than 30 years of experience in taxation and wealth preservation strategies. He represents individuals, families, and fiduciaries on estate planning, federal estate and gift taxation, generation-skipping transfer taxes, probate, and trust administration.

Gregg also advises business owners on effective succession planning and tax structures. He knows that the goals of individual family members are sometimes out of sync, and when family conflicts come into play, he applies his...