2023, the Chinese Year of the Rabbit, has been generally positive for financial markets, but not without a fair number of challenges. With the holidays just around the corner, the final days of the year will soon be upon us. This is a good time to be vigilant and quick-minded regarding your financial plans and money-related action items.

Here are a few considerations:

Capital Gains and Losses
We are mindful of opportunities to take advantage of tax optimization strategies within your portfolios. If you plan to make charitable donations of stock (more on that below), any long-term holdings with large gains are tax-efficient candidates.

Roth IRA Conversions
A Roth conversion moves funds from your Traditional IRA and puts them into a Roth IRA. The amount converted is taxed as ordinary income in the year of the conversion. Because Roth IRA money avoids future federal taxes on distributions, this strategy can help reduce your tax burden over the years, in many cases taking advantage of lower tax brackets.

Backdoor Roth IRAs
A “Backdoor” Roth contribution is when you use after-tax dollars to create a Traditional IRA and immediately convert it to a Roth IRA with minimal or no tax consequences. This could be a great option for people who are normally unable to contribute to a Roth IRA due to the income limitation. For tax reasons, the strategy works best if you don’t have an existing Traditional IRA.

Employer Retirement Plans and HSAs
Make sure you’re maxing out your 401(k) and HSA (Health Savings Account) at work:

• For 2023, the maximum employee 401(k) contribution is $22,500, with an additional $7,500 “catch-up” allowed if you are age 50 or older by the end of the year.
• If you have access to a High Deductible Health Plan (HDHP) and the option to contribute to a Health Savings Account (HSA), you’ll enjoy triple tax benefits! HSA contributions reduce your taxable income, avoid payroll tax, and growth comes out tax free in the future (if used for qualified medical expenses). The funds can cover a variety of expenses in the future, such as Medicare premiums, long-term care premiums, or many other coverages and costs. After age 65, the money could also be withdrawn just like an IRA (by paying Income tax on the withdrawals).

Family Gifting and Estate Tax Planning
If you and your family anticipate dealing with estate taxes, a variety of trusts and tax planning techniques are available, including:

• GRAT (Grantor Retained Annuity Trust) – Pass appreciation of an asset to the next generation while retaining control of the principal.
• SLAT (Spousal Lifetime Access Trust) – Protect assets from future estate taxes while allowing the spouse to have access during his or her lifetime.
• Charitable Trust – Receive a charitable income tax deduction combined with a tax-efficient way to transfer assets to the next generation.
• Dynasty Trust – Shield assets for multiple generations from creditors, divorce claims, as well as future estate tax rate increases.
• ILIT (Irrevocable Life Insurance Trust) – Protect life insurance proceeds from estate taxes.
• Lifetime QTIP (Qualified Terminable Interest Property) – Leave assets for a surviving spouse and determine how the remaining assets are distributed after the survivor dies.

As of 2023, the federal lifetime estate tax exemption is over $12.92 million per person ($25.84 million for a married couple), indexed for inflation. Please note that these amounts are scheduled to drop back to approximately half of their current values in 2026.

The 2023 gift tax exclusion is $17,000 per individual ($34,000 for a couple), to each recipient. There is no limit to the number of recipients in a year. For example, a couple could give $34,000 to a child’s 529 college funding plan without owing any gift tax, and they could give another $34,000 for a second child. Payment of tuition or medical bills is not subject to the annual exclusion limit if made directly to the institution.

Charitable Giving
Donations given to qualified charities reduce your tax liability while supporting the causes you believe in. To gift efficiently, such as deciding whether to use securities (stocks) or cash, please consult your Crestwood team as well as your tax professional.

Making use of a Donor Advised Fund (DAF) may be more helpful than traditional gifting strategies, depending on your situation. This approach allows you to gift a large amount all at once into the DAF, enjoying the tax benefit in a single year, and then “spread out” the actual gifting to charities over several years, funded from the DAF account.

Qualified Charitable Distributions (QCDs) are another possibility to consider if you have an IRA and are 70.5 or older. You can gift up to $100,000 per year, with donations sent directly to qualified charities as tax-free distributions. QCDs can be used to satisfy your Required Minimum Distribution (RMD) for the year, so if you don’t need that income, this could be a great option.

A Time for Resilience
As the Year of the Rabbit turns the corner and heads for the last lap, keep your Crestwood team in mind for any questions or help in implementing these strategies. The Rabbit also represents being ingenious, so let’s work together to find creative solutions and improve your financial outlook! We look forward to 2024 as we harness the power of the Dragon.

 

This document is provided by Crestwood Advisors (“Crestwood”) for general informational purposes only and does not constitute investment, tax or legal advice. Crestwood is not a law firm or an accounting firm and does not provide legal, audit or attest services. For investment or tax advice, please consult with your adviser.

Non-citizens, including resident Green Card holders who are married to U.S. citizens, are treated differently for estate and gift tax purposes than U.S. persons.

Without proper planning, non-citizens may be subject to unexpected and substantial tax liabilities. This adds complexity to the estate planning process, so partnering with the right team of advisors is critical.

Estate Tax Planning

When embarking on the estate planning process, many people focus on who to leave their assets to and who best to name as a fiduciary. But they may not give as much thought to the income, estate and gift tax regulations that are the backbone of a well-crafted estate plan. When one or both spouses are not U.S. citizens, their status may have a major impact on the estate and gift tax picture.

One key element of estate planning is transferring wealth to minimize estate tax exposure. For estate and gift tax purposes, many rely on the marital deduction. This allows a person to give unlimited assets to a spouse during his or her lifetime without triggering a gift tax, and leave unlimited assets to the spouse at the time of the first death without owing estate tax or using up any estate tax exemption.

Unlike the estate and gift tax exemption, which both citizens and Green Card holders can use to make transfers, the marital deduction only applies to U.S. citizens. If you are a citizen married to a Green Card holder, you may not utilize the marital deduction. Rather, you are limited to what can be given to your spouse tax free during your lifetime (in the form of annual gifting)  and upon your death ($175,000 in 2023).

Consulting with your team of professionals (tax, estate planning and wealth management), well versed in planning for non-citizens, regarding asset transfers to a non-citizen spouse is crucial to assuring an efficient transfer of assets.

Consequences of Assets Held Outside the U.S.

When engaging in the planning process, it is important to take an inventory of assets you and your spouse have and identify where they are and how they might be taxed. Assessing how assets are taxed is generally easy for assets held in the U.S. but less so for assets held outside the U.S. There may be income and/or transfer taxes associated with assets held outside the U.S., potentially exposing individuals and their estates to liabilities in two or more countries. Although the U.S. does have tax treaties with several countries to ensure assets are not taxed twice.

Determining how foreign assets are transferred may also require a set of planning documents in the country where the assets are housed. Engaging counsel in the U.S. and in the country where the assets are held is an important component of the planning process. Assembling advisory teams in both regions – even though this may seem more complex and costly than relying on a single team to handle your planning concerns – will help avoid tax issues and non-compliance.

If you or your spouse is a Green Card holder, you are considered a resident for income tax purposes and are required to file a tax return on all income, not just income derived from assets in the U.S. Thus, regular consultations with your advisors regarding adequate and appropriate reporting may be helpful in the planning process.

The Tax Benefits of U.S. Citizenship

If you or your spouse are currently a Green Card holder and you intend to remain in the U.S. long-term, consider pursuing citizenship. Becoming a citizen can make you eligible for tax benefits, such as the marital deduction, allowing you to incorporate the deduction into your estate planning strategies and avoid incurring gift taxes when transferring assets to one another.

If you don’t intend to become a citizen or are in the process but are not yet a citizen, your estate planning documents should contain language allowing you to leave assets in trust for the benefit of your non-citizen spouse during their lifetime without a transfer tax consequence. This language is called a qualified domestic trust (“QDOT”) provision.

Build the Right Team

Any time there’s an element of international tax exposure, assembling the right team of advisors is key. Once your team is assembled, transparency about your assets, your income and the residency status of you and your family will allow your team to build the appropriate plan.

Partnering with advisors who understand the unique complexities of your wealth planning needs, the tax laws in the U.S. and your home country, as well as any treaties that may exist between them, is foundational to growing and protecting your wealth.  Reach out to Crestwood for help as you begin this journey.

 

The information contained in this document is provided by Crestwood Advisers Group, LLC (“Crestwood”) for general informational purposes only. For estate planning advice, consult with your advisers. Crestwood is not a law firm and does not provide legal advice. Crestwood is not a CPA firm and does not provide audit or attest services.