Without specifics about yourself I’ll make this answer generic in a personal and in a business sense.
I presume you looked at your financial estate planning (401k, mutual funds, stocks and bonds, life insurance, etc) which is important as there are some changes such as to an inherited IRA. Ask your investment professional. You should also think about your legal estate planning. After all you are a year older; you may have gotten married, had a new child, had a child reach the age of majority (19 years), gotten divorced or suffered the death of a spouse or even a child. You may have a child graduate, enter the workforce and be off your payroll. Even if the child is off your payroll you may keep them on your health insurance until they reach age twenty-six (26) as a buffer or necessity if you still have a family plan but it may be that you decide not to continue to carry the young adult child if the plan has changed and the cost can drop significantly. Your financial estate planning goes hand in hand with your legal estate planning and you should discuss that with your lawyer, not that he or she will try to advise you on whether your investment advisor is steering you correctly but rather the impact of your financial worth on your legal estate.
For 2023 the gift tax exclusion moves up one thousand dollare from last year to $17,000.00 a person, as a gift (child, grandchild, etc.) not requiring the filing of a Gift Tax return or up to $34,000 to a person if both you and your spouse gift to the same person once per year. There is a lifetime basic exclusion and generation skipping tax (GST) limit of $12.92 million in 2023. There may be a tax advantage for the wealthy in that and if this seems to be something that might be helpful to your financial planning you should seek the advice of an accountant or other tax/ financial professional (may include a tax attorney). For 2022, there was a $12.06 million total estate tax exemption per individual; 2023 will provide a $12.92 million tax exemption. The total GST and total estate tax exemption are inclusive in total in that they cannot exceed $12.92 million The portable portion mentioned above may be available to a surviving spouse who may be able to combine through election their unused estate credit amounts up to a total of $25.84 million. See your tax professional after the death of the first spouse if your assets are in the millions. Remember that life insurance is considered for estate tax purposes if you have control over the policy (i.e. ability to change the beneficiaries, cancel the policy, etc). Some individuals have large insurance policies and in the past not inconceivable for high middle class people to have an estate over prior limits but the possibility could even exist with some wealthier individuals. If you die in 2023 with an estate of greater than $12.92 million (or $25.84 million for a second to die spouse) then that amount over $12.92 million will be taxed at 40%.
With President Biden and the Democrats in control of the Senate and Executive branches, there are some items that may well change and as of this writing are speculative. Rather than the annually successive increase from $12.92 million this year, set to be rolled back in 2026 to maybe $7.1 million per individual, it is a distinct possibility that things may roll back earlier; but when and how much is anyone’s guess. The midterm changes were not the expected bang and of course there is another Presidential election in just under two years. Other items that were thrown around last year included a rollback to $3.5 million, a 45% tax on amounts greater than whatever the excluded amount is for the year you die or changes to capital gains tax rates.
With that said you need to pull out your Last Will and Testament and review it. If you have had any life changes (marriage, divorce, death, large inheritance, new child, etc.) a new Will may be in order. If you don’t have a Last Will and Testament you need to have a lawyer prepare one as soon as possible. Why do you need one? Because if you don’t then the State of Alabama has one for you. Some of the spousal examples under the rules of intestacy (dying without a Will); (1) first $100,000 to spouse and then 1/2 of the remaining estate to the living parent(s) when there are no children, (2) if children then the spouse gets $50,000 and 1/2 of the rest, (3) if one or more of the children are not yours then the surviving spouse only gets half of everything, period. This is probably not the estate plan you have in mind. There are internet sites and software programs that can also assist with a Last Will and Testament but there is no guarantee that it will pass muster regarding state rules on probate nor a guarantee that it will do what you want upon your death. The best chance of meeting estate goals is through a lawyer and if you are of moderate means, you may be surprised that it is less expensive than you think. In the long run a Will may save money since an intestate estate when probated requires the bonding of the Personal Representative and an inventory of the decedent’s estate. I run into too many old or non-attorney prepared defective Wills when it really counts and there is an attempt to probate the estate. Obviously such probate is not without issue. If you have an out of state prepared Will it should be acceptable for probate since under the Full Faith and Credit Clause (Section 1, Article 4) of the United States Constitution a valid Will prepared in one state is valid in Alabama. There can be issues so a review with an Alabama attorney is always a good thing to do.
Aside from the Last Will and Testament you may want to have a Power of Attorney prepared, both one for financial reasons and health. Most prepared these days are durable which require wording that the power of attorney is effective even in your disability or incapacity. Financial Powers of Attorney became a statutory form as of 1 January 2012. Most attorneys have concerns about the filling in the blank and initialing choices format and most now insert tried and true language used in their practices for their many years. A financial Power of Attorney is now by default a Durable power; however I insert the needed language anyway to make sure that there are no questions about it’s durability. A Power of Attorney (POA) can be very powerful and placed in the wrong hands can be damaging such as a daughter that is named AGENT and decides to sell your lake house and push you towards moving to an assisted living facility. On the other hand, naming a trusted AGENT and retaining the POA for future needs can be extremely beneficial. The POA can be used so that someone can write your bills for you during incapacity, file your taxes and with health/ Health Insurance Portability and Privacy Act (HIPAA) provisions monitor your care with the doctors and hospital as well as handle medical insurance billing. The POA may also be used to nominate whom you would want as a conservator or guardian should one need to be named for you through a Court proceeding. A health care power of attorney can be used to coincide with the Advance Directive mentioned below should you have need to name another or others to help with health care decisions.
The final personal document would be an Advance Directive for Health Care, which is composed of a Living Will and Health Care Proxy nomination. It will allow you to make certain decisions about end of life issues should you later become unable to speak for yourself and two doctors have determined that you will likely die in the near future. This is the document that Terri Schiavo DID NOT have and for that reason the court found the testimony of the “husband” who was then living with another woman to be credible as to Terri’s final wishes. Hmmmmm. Naming a Health Care Proxy is the same as naming a health care power-of-attorney such as under a POA. The proxy is given limited rights under which situations that they can make decisions. And by the way, the ex-spouse automatically loses that job as proxy upon divorce. That’s dodging a bullet!
If retirement is nearing and you will also receive Social Security consider that the 2023 Medicare Part B will move (actually decrease) from the 2022, $170.10 to $164.90 per month dependent on whether the senior is subject to the statutory “hold harmless” provision. With higher income brackets so does the cost for Part B increase. If you need nursing home (skilled nursing) care under Part A, days 1-20 are fully covered provided you continue to meet Medicare’s requirements for those days; the co-payment for days 21-100 (if you qualify) will be $200.00 per day ($194.50 per day in 2022). After day 100 you are 100% on your own unless you have some other means of long term care payment. If you have not already checked on long term health care insurance you should do so now. It not only will cover nursing home care but can also cover assisted living or in home care. If you consider this insurance also look carefully at the options since they may be equally as important as the policy itself. This includes inflation increases which are very important or even the option of continued coverage for a certain amount of time when one with “forgetfulness” forgets to pay the premium.
With the exception of a few states and the District of Columbia, the individual mandate under the Affordable Care act (Obamacare) was changed in 2019 to zero. That of course continues to be contentious in that without the mandate it is argues that the ACA is null. Four states and the District of Columbia have state mandate penalties though Vermont has no penalty attached to their mandate. The time to make health care changes under the ACA ended 07 December 2022 and unless you have a qualifying event or become eligible under Medicaid/ CHIP after the open enrollment period passes this will be the last opportunity until the 2023 period begins in October. Older Americans may be eligible both for Medicare and Medicaid and impoverished Americans may be Medicaid eligible when they cannot afford premiums under Obamacare and some Americans are eligible for insurance from the market place with subsidized premiums.
If you are currently in business or considering a business what about entity? A sole proprietorship offers pass through taxation but no limited liability. Your personal and business assets are at risk in a lawsuit. A Limited Liability Company (LLC) or a Registered Limited Liability Partnership (RLLP or LLP) offers the same pass through tax advantages as well as limited liability. A “C” corporation offers the same limited liability but there is taxation on the corporation and taxation on the shareholders. If you are in one of these entities and about $80,000.00 plus salary talk to your accountant about the possibility of an “S” corporation election. Current tax considerations suggest that pass through entities not involved as professional service businesses (accountants, attorneys, etc) such as sole proprietorships, LLC’s, LLP’s and S corporations may take an additional significant percentage off their income. Because pass through entities are taxed at the owner’s tax rate this will give an additional percentage decrease in taxable income.
In addition to the advantages of pass through taxation and limited liability there may also be some self-employment tax advantages since some of the income can be paid to a shareholder- employee as a profit distribution. The Internal Revenue Service however looks for Shareholder- Employees that pay themselves substandard salaries for their position in order that they can take more from the company as a distribution and save more on Self Employment taxes. The IRS will consider a reasonable income based on IRS summarized factors considered by a Court case from the Eighth Circuit, which advised shareholders to give them careful consideration in establishing their compensation. The factors are:
(1) Employee qualifications;
(2) The nature, extent, and scope of the employee’s work;
(3) The size and complexity of the business;
(4) Prevailing general economic conditions;
(5) The employee’s compensation as a percentage of gross and net income;
(6) The employee-shareholder’s compensation compared with distributions to shareholders;
(7) The employee-shareholder’s compensation compared with that to non-shareholder employees or paid in prior years;
(8) Prevailing rates of compensation for comparable positions in comparable concerns; and
(9) Comparison of compensation paid to a particular shareholder-employee in previous years where the corporation has a limited number of officers.
An “S” Corporation election only exists through the IRS and has specific requirements. So you can be an existing LLC, C Corporation, etc. but elect via the IRS as an “S” Corporation. Ask your accountant about whether it is right for your business.
I hope that this has helped with your question. If you need a lawyer you can contact the Alabama State Bar Lawyer Referral service or ask a trusted friend about a lawyer that they might recommend.
This article is informative only and not meant to be all inclusive. Additionally this article does not serve as legal advice to the reader and does not constitute an attorney- client relationship. The reader should seek counsel from their attorney should any questions exist.
"No representation is made that the quality of legal services performed is greater than the quality of legal services performed by other lawyers."