2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

ESTATE PLANNING TECHNIQUES WITH HIGHER INTEREST RATES Over the last two years, the Federal Funds rate has increased from less than one percent to over five percent. Several estate planning strategies advantageous when interest rates were low are less appealing now. With higher interest rates, taxpayers should consider the following techniques. Charitable Remainder Trust (CRT) A taxpayer with an asset that has a significant unrealized gain (such as real estate, stocks, or a closely held business) can effectively contribute that asset to a CRT. The trust is tax exempt (state tax laws may differ) and can effectively sell that asset on a tax-deferred basis. The taxpayer will also get a charitable income tax deduction on their personal tax return in the year of funding. This deduction amount is partially a function of the section 7520 rate. As interest rates rise, so does the section 7520 rate. The government assumes the remainder interest passing to charity in a rising interest rate environment will be greater than in a low interest rate environment. As interest rates continue to rise into 2023, the tax deduction becomes more powerful.

Qualified Personal Residence Trust (QPRT) A QPRT is an irrevocable trust that transfers a personal residence to trust beneficiaries. The QPRT lasts for a term of years, during which the grantor may continue to use the residence as their own. Upon the expiration of the trust term interest, the residence is transferred to remainder beneficiaries – often held in further trust to benefit children (to maximize asset protection and tax benefits). If the grantor wants to continue to live in the home after the expiration of the trust term, the trust or its beneficiaries can rent it to the grantor at a fair-market-value rent. The initial transfer to the QPRT is a taxable gift of the value of the remainder interest, calculated using the §7520 rate. The higher the rate, the higher the value of the grantor’s right to use the residence as their own during the term of years, and the lower the value of the gift of the future remainder interest. The taxable gift amount decreases in the current high-interest rate environment, making the QPRT a highly attractive strategy. As an additional strategy, the residence can be transferred from a joint tenancy to a tenancy in common, allowing each spouse to gift their respective ownership interest and receive other valuation discounts.

For example, assume you have a grantor who is 60 years old and owns a residence worth $3,000,000. When the authors wrote this article, the §7520 rate was 5.4%. The grantor can create a QPRT with a 20-year term and transfer the residence with a fair market value of $3,000,000. The taxable gift is the present value of the remainder interest - $607,920. Meanwhile, in the year of funding, the grantor has moved an asset worth significantly more ($3,000,000) into a trust that can provide asset protection and tax benefits at a greatly reduced gift/estate tax cost. Furthermore, if we assume an after tax growth rate of 5% on the asset, the value of the residence at the end of the term (20 years) will be $7,959,893! The federal estate tax savings of this plan is $2,940,789. Taxpayers who live in states with a state estate tax will recognize additional tax savings. ADDITIONAL ESTATE PLANNING TECHNIQUES Those taxpayers that may incur an estate tax when the tax exemption amount sunsets should consider making gifts outright or in trust to use their exemptions before 2026. However, not all taxpayers may have enough exemption to reduce their estate. While CRTs and QPRTs are most attractive with higher interest rates, the following techniques can still be effective.

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