2023 Marcum Year-End Tax Guide

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“Taxpayers should also consider state and local tax laws and how they may differ from federal tax laws.”

Sell Assets To An Intentionally Defective Grantor Trust • A taxpayer may sell assets to a grantor trust in exchange for a promissory note. (Real estate owners often are great candidates for this strategy.) • By using a grantor trust, the sale of appreciated assets will not trigger income tax. In addition, the grantor will continue to pay income taxes on the trust income, thereby allowing the trust assets to grow tax-free. This strategy is ideal for when there is a high potential for appreciation. Further, the payment of the income tax on a grantor trust does not constitute an additional gift. Grantor Retained Annuity Trusts (GRATs) • With market volatility and some assets still trading at depressed values, a Grantor Retained Annuity Trust (GRAT) enables taxpayers to transfer assets to a grantor trust. The taxpayer retains an annuity interest for years and leaves the remainder to their children. • If the assets appreciate during the trust term, the appreciation passes to the heirs without using any of the taxpayer’s lifetime exemption amount.

• This type of trust can be structured as a zeroed-out GRAT; effectively, no lifetime gift or estate tax exemption would be used on the gift to the trust. Charitable Lead Trust (CLT) A CLT can be a beneficial planning technique for those who expect 2023 to be an unusually high year for income due to a one-time event, such as a business sale. If you find yourself in this position, and you have a charitable inclination, then you should consider a special type of trust that allows you to reduce your effective tax rate on the sale of your company (or other asset) while benefitting your favorite charity of choice. The grantor CLT effectively frontloads a charitable income tax deduction, which can offset other income sources. The trust will then pay an annual unitrust or annuity payout to charities of choice, and at the end of the trust term, the remaining principal can revert to you or your loved ones. Taxpayers should also consider state and local tax laws and how they may differ from federal tax laws. INCOME TAX PLANNING FOR TRUSTS It is rare for the tax law to allow planning to be done after the close of a taxable year. In the context of

fiduciaries, an election available under the code provides for income tax planning between the fiduciary and beneficiary. Thanks to the IRC 663(b) election, known by its street name as the “65-day election,” a fiduciary can elect to treat distributions made within the first 65 days of a year as if they were made during the prior tax year. In effect, this could shift income from the fiduciary to a beneficiary. Beneficiaries are often in lower income tax brackets than a trust or an estate, thanks to the compressed tax brackets of trusts and estates. The highest bracket for a trust or estate for 2023 starts at $14,450 of taxable income. Contrast this to the highest bracket for a taxpayer filing as single, which begins when taxable income exceeds $578,125. • This election applies only to estates and non-grantor trusts that file as “complex trusts.” Grantor and non-grantor trusts that are “simple trusts” do not qualify. A simple trust is any trust that requires fiduciary accounting income to be distributed. A complex trust is not a simple trust (i.e., a discretionary trust). The maximum amount of distributions covered by the election is limited to the greater of (1) fiduciary accounting income for the tax year for which the election is made or (2) distributable net income (DNI).

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