Despite the various proposals to reduce exemptions from federal transfer taxes (inheritance tax, gifts and GST) and to increase tax rates, none of them were enacted in 2021. This means exemptions increased for inflation in 2022, giving customers a ‘second bite to apple’ on locking in premium rates and exemptions before they drop to $ 5 million in 2025, at the latest .
Inflation of tax exemptions increases for 2022
For 2022, the increased transfer tax exemptions are as follows:
- $ 12,060,000 exemption from federal inheritance tax and a top federal tax rate of 40%.
- GST exemption of $ 12,060,000 and top federal GST rate of 40%.
- The lifetime gift tax exemption is $ 12,060,000 and a maximum federal donation tax rate is 40%.
- The annual donation tax exclusion amount increases to $ 16,000.
Although this increased exemption expires on December 31, 2025, the IRS and the Treasury have clarified that the government will not “recover” gifts given between 2018 and 2025, with respect to a person who died in 2026 or beyond. that exceed $ 5 million, when the gift and inheritance tax exemptions revert to the $ 5 million exemption provided for by the 2012 law.
The opportunity created by these increased exemptions under the 2017 law is to leverage larger lifetime gifts through various estate planning techniques to transfer income-producing assets to individuals who may be in brackets. lower tax rates and / or reside in lower tax rate states. or no state income tax.
In particular, those who have used up almost all of their previous exemptions should consider making additional lifetime donations to use the increased exemptions in 2022. So if you have used all of your $ 11.7 million exemption in 2021, you can donate an additional $ 360,000 tax-free in 2022.
How do these changes affect your existing estate planning documents?
Most estate planning documents are drafted in a flexible manner so that their overall structure is not affected by increasing exemption amounts. However, there are still specific areas where you will want to update your documents.
One area is that, unlike the inheritance tax exemption, the GST exemption is not transferable upon the death of the spouse. States that have separate estate tax regimes (such as Connecticut, Massachusetts, and New York) do not allow portability of the estate tax exemption. Using a bypass trust on the first death of a married couple can be very useful when these portability limits apply.
Additionally, if you are a married couple and live or own real estate in a state with state estate tax, such as Connecticut, Massachusetts, or New York, there may be provisions that should be added to your documents. which could save the state inheritance tax on the death of the first spouse.
Gift tax update
The annual donation tax exclusion amount per donee has increased to $ 16,000 for donations made by an individual and to $ 32,000 for donations made by a married couple who agree to “divide” their donations. in 2022. Instead of cash donations, consider donating securities or stakes in private companies or other family entities. The assets you donate now may be worth much less than they once were due to the effects of the pandemic. The value of these assets will hopefully increase in the future, creating a built-in rebate that the Internal Revenue Service cannot reasonably question. This reduction will apply for the benefit of your beneficiaries, if the value of these assets increases.
Your annual exclusion donations can be made directly to your beneficiaries or to trusts you establish for their benefit. It is important to note, however, that donations to trusts will not qualify for the annual donation tax exclusion, unless the beneficiaries have certain limited rights over the donated assets (commonly referred to as powers of withdrawal “Crummey”). If you have created a trust that contains beneficiary withdrawal powers, it is essential that your trustees send Crummey Letters to the beneficiaries whenever you (or anyone else) make a trust contribution.
If you have created an insurance trust, remember that any amount paid into the trust to pay insurance premiums is considered an addition to the trust. Accordingly, Trustees should send Crummey Letters to Beneficiaries advising them of their withdrawal rights on these contributions. Without these letters, transfers to the trust will not qualify for the annual gift tax exclusion.
2021 donation tax returns
Tax returns for donations you made in 2021 are due on April 15, 2022. You can extend the due date until October 15, 2022 on a timely filed request for an automatic extension of the filing deadline. your 2021 income tax return, which also extends the deadline for filing your donation tax return. If you created a trust in 2021, you should ask your accountant to choose whether or not your GST exemption is applied or not, as the case may be, to contributions to that trust. It is essential not to neglect this step, which must be taken same if your donations do not exceed the annual donation tax exclusion and, therefore, would not otherwise require the filing of a donation tax return. You should call your lawyer if you have any questions about your GST exemption award.
Thus, as long as the highest exemptions last, you will see an annual increase in the amount of the exemption, which can increase the rate considerably, if the inflation rate remains high. These higher exemptions will disappear by the end of 2025 at the latest.