Fall 2022 Estate Planning Update

Adam J. Centner

This Estate Planning Update reviews the newly-released estate tax exemption and gifting adjustments for 2023, the extended deadline to make a portability election, and simple ways that business owners and professionals can implement asset protection strategies to better safeguard their property from third-party creditors.

2023 Exemption and Gift Amounts.  The numbers are in! After a year of globally high inflation, the inflation-indexed Federal estate and gift tax exemption for 2023 has increased to $12.92 million per person (up from $12.06 million this year), and the annual gift tax exclusion amount has increased to $17,000 per donor per donee (up from $16,000 this year).

With an anticipated reduction in the Federal estate and gift tax exemption in January 2026 – likely to around $7 million – high net worth individuals should consider utilizing the full exemption through gifting vehicles prior to any reduction. 

Portability Deadline Extension.  In July, the IRS issued a revenue procedure allowing an estate to make a portability election for up to five years after the death of a decedent – an increase from the previous two-year deadline.   A portability election allows the estate of a deceased individual to “port” the individual’s unused estate tax exemption amount to the individual’s surviving spouse, and portability will become an increasingly important concept for many individuals if and when the Federal estate tax exemption reduces in the future. 

Asset Protection Strategies for Business Owners and Professionals.  I find that my clients – particularly business owners, physicians, public company board members, teachers, and other professionals – are increasingly interested in protecting their assets from potential creditors.  As such, below are some simple, yet effective ways that clients can protect themselves and their family from future creditor risks.

Inherited assets.  When we think of asset protection planning for our clients, we generally start with how to protect the client’s assets, but what about those the client will receive from their parents or other family members? Assets that pass to beneficiaries in trust, and remain in trust, are generally protected from the beneficiary’s creditors (subject to well-drafted trust agreements and proper trust administration). In many cases, the beneficiary can even serve as the trustee of the trust, allowing him or her to control and benefit from the trust assets while protecting the assets from current or future creditors. For business owners and other professionals, having assets that are immediately and permanently out of reach of creditors is not only a financial win, it’s also invaluable peace of mind.

The conversation for your client may be a bit awkward, but consider suggesting that they discuss with their parents whether the parents’ estate plans are in proper order and if assets are retained in trust. A little planning now can go a long way for your client’s future. And just as important, as parents themselves, encourage your clients to engage in the same type of planning to protect their children from creditors, including a divorcing spouse.

Dividing assets between spouses.  Assets titled to one spouse are not subject to the creditors of the other spouse.  As such, if one spouse has a significantly higher risk of liability than the other, clients should consider titling large assets such as real estate and taxable investment accounts in the name of the lower-risk spouse.  Of course, these assets are still subject to the lower-risk spouse’s creditors, so an umbrella insurance policy may also be a wise investment for additional protection.

Funding protected assets. Under federal and many state laws, certain assets are always beyond the reach of creditors. In Ohio, these include most retirement accounts, life insurance proceeds and life insurance cash value. To that end, clients should consider — in consultation with their financial advisor — fully funding retirement plans and building up the cash value in the whole life policy to bank a reserve of assets that are safe over the long term.

Asset protection trusts. For the past decade, Ohio has been at the forefront of the nation’s asset protection laws, at least from the protectee’s perspective. If a client is married and has substantial assets he or she does not expect to need during the client’s lifetime, the client may gift the assets to a spousal lifetime access trust (SLAT). Beyond the estate tax benefit, especially if the assets appreciate considerably (which is outside the scope of this Legal Update), a SLAT allows the client’s spouse to benefit directly from the assets (and the client indirectly through the spouse), but it also allows for the assets to be sheltered from future creditors of either spouse.

Similarly, an Ohio Legacy Trust allows assets to be moved beyond the reach of future creditors but permits the grantor to continue to exercise a limited element of control and benefit from the trust assets.

Formalized business contracts. In the heat of running a business, it’s easy to get into a routine and let important things fall to the back burner. One concern that always deserves full attention, however, is the drafting of proper business contracts and adhering to procedures. Not only can a poorly drafted contract (or no contract at all) subject a business to unnecessary risk, it can also make it easier for a creditor to pierce the corporate veil and attack personal assets. Proper lease and vendor agreements, for example, should always be in place, and business assets should be titled in the name of the business, not in any individual’s name. Formalizing procedures will help to reduce your client’s personal and business risk.

If you’d like to discuss these topics or other estate planning matters, or I can ever be a resource to you, please contact me at 513.579.6488 or acentner@kmklaw.com.