2032A

By: Robert Moore, Tuesday, December 27th, 2022

 

Legal Groundwork

As we wind down 2022 and look forward to 2023, there are few changes related to estate planning that will occur in the new year.  The following is a summary of those changes.

 

Annual Gift Exclusion

The annual gift exclusion is the amount that one person can gift to another person with no estate tax implications.  In 2023, the annual exclusion will increase from $16,000 to $17,000.  This means that a person can gift $17,000 to as many people as they wish without causing a gift tax or a reduction of their federal estate tax exemption.  For example, Grandfather gifts $17,000 to each of his three children and seven grandchildren.  Grandfather gifted a total of $170,000 without incurring a gift tax or reducing his federal estate tax exemption.  The gift can be money, real estate, machinery, ownership in a business entity or just about any other asset.

 

Federal Estate Tax Exemption

The federal estate tax exemption is the amount of net worth exempt from estate taxes at death.  If a person dies with a net worth less than the exemption, no estate tax will be owed.  If a person dies with a net worth exceeding the exemption, the amount exceeding the exemption will be subject to a 40% estate tax.  In 2023, the exemption will increase from $12.06 million to $12.92 million. 

To further explain the estate tax exemption, let’s continue the prior example using 2023 values.  Grandfather has a net worth of $13.0 million. If he were to die with this net worth, $80,000 would be subject to estate taxes.  However, after he makes gifts to his children and grandchildren, his net worth is now $12.83 million.  Grandfather’s net worth is now less than the federal exemption, so if he dies, there will be no estate taxes.

 

2032A Limit

The IRS allows eligible farmers to reduce their estate valuation by valuing farmland at agricultural value rather than fair market value.  This reduction in value is non unlimited.  In 2023, the IRS will allow a reduction of $1,310,000, an increase from the 2022 limit of $1,230,000.  Eligibility requires the decedent, among other things, to have been a farmer with at least 50% of their assets being farm assets and at least 25% of their assets being farmland. 

Consider the following example using 2023 values.  Bill was a retired farmer and died with a net worth of $14 million.  He was eligible for 2032A so his estate was entitled to a $1,310,000 reduction.  After applying the section 2032A reduction, Bill’s estate was valued at $12,690,000 which is below the federal estate tax exemption.  By applying 2032A, Bill’s estate is able to avoid estate taxes.

It should be noted that applying 2032A to an estate is complicated and should be done with the assistance of legal counsel.

 

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