Estate Planning Rundown for 2023: The Numbers You Need to Know

In addition to being a time where we look back at how we did the prior year, New Years is also where we look forward and focus our goals on what we want to accomplish in the future. New Years also bring new changes, and everyone’s favorite topics, tax law and estate planning, are no different. As you look forward to the new year and chart your goals, keep in mind these tax changes so you can maximize your 2023.

Estate Taxes

First up are estate taxes. This is a tax on the value of your estate when it reaches over a certain amount after you pass away. That’s why people call it a death tax. Last year it was about $12.6m. For 2023, it is now a hair shy of $13m. $12.92m to be exact. This means that so long as your estate is below that number, your estate won’t owe any taxes, federally. There are 13 states that collect an estate tax at different levels: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and Washington DC. But unless you live in one of those states, then so long as your estate is under the exemption level, no taxes.

This number will go up again in 2024 and 2025. However, if Congress fails to pass any legislation for 2026 and beyond, the exemption level will go back down for 2026 to an estimated $6m.

Inheritance Taxes

Speaking of death and taxes, the federal government does not collect an inheritance tax while 6 states do: Iowa, Kentucky, Maryland (double dipping with an estate tax), Nebraska, New Jersey, and Pennsylvania. If you don’t live in one of those state, then great news, no inheritance tax for your heirs. If you do though, speak to an attorney in your state to see if there is a method to minimize it.

Gift Taxes

However, what if you wanted to simply gift money to someone to avoid estate and inheritance taxes? Well, the government’s thought of that since they want their tax dollars, so there is such a thing as a gift tax. It’s a tax on the giver based on how much they gave away, not the recipient. In 2023, you’ll be able to give away up to $17,000 per person without having to pay a tax. Read our blog here to for more information.

Going further, this is only a tax on the giver per recipient, meaning you can give 4 people money and so long as you didn’t give more than $17,000 to any one of them, the government doesn’t care. The second you give someone $17,001; you will have to pay a tax on the overage – 40% of that extra $1.

Lifetime Gift Tax Exemption

However, there is a neat little thing called a lifetime gift tax exclusion. That is, you can give away money and assets, up to that exclusion limit, during your lifetime, apply it towards that lifetime exclusion number, and not pay a gift tax unless you were to exceed it. It does entail you telling the IRS you are applying the gift towards your lifetime exclusion, but so long as you do so, you can move a lot of money and still not pay a tax, because that exclusion limit, is equal to the federal estate tax exemption, which if you remember, is now $12.92m.

Small Estate Threshold

Next is something that is wholly state specific, the small estate threshold. It’s the maximum value an estate can be before it is required to go through probate court and get a judge’s approval before disbursement by law. In California, that threshold is any real property, regardless of the value, or a gross estate value of $184,500. The small estate threshold will stay at that level until 2025, where it will be adjusted based on inflation, likely jumping up again. Real property will likely always be an automatic trigger in every state, but the gross value will vary wildly based on the particular state. California will likely always have the highest threshold at $184,500 so check your state’s laws when determining how much money to leave in your name alone as opposed to having it in a trust or having a pay-on-death designation on the account. Many eastern states often have a lower threshold and even Texas wants court approval for something as low as $5,000 so look out.

Homestead Exemption

Now, let’s discuss your home. While the rules for homestead exemptions vary by state, here in California, we recently had an increase in the exemption limit thanks to California Assembly Bill 1885 back in 2020, bringing it up to between $300,000 and $600,000. The actual amount will equal the prior year's median home sale price amount if it is within in this range. To put it simply, the minimum exemption is $300,000; the maximum is $600,000; but your particular exemption limit will not be the average, but the median home sale price from the prior year for your county. Additionally, these figures will be tied to inflation and adjusted annually.

Americans Without an Estate Plan

Regarding your estate plan, or potentially the lack thereof, according to a survey conducted by the senior living referral service, Caring.com, only about 33% of Americans have any sort of estate planning documents in place. That means 67% of the population is leaving what happens to their estate up to whatever the laws in their state dictate. They are leaving what happens up to the government, rather than having a say in the matter. Even though there are many benefits to estate planning no matter the size of the estate, including saving thousands of dollars in legal fees, the overwhelming majority of Americans are still leaving things up to others to figure out. Don’t be part of the crowd. Plan your estate and do what’s best for your family.

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