United States: Transfer Rights Planning Considerations for 2022
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Last year, several proposals were introduced in Congress that would have significantly altered transfer tax planning for high net worth individuals and business owners. The proposals fell flat due to the wafer-thin majorities Democrats hold in Congress. Even if no changes are made in the short term, on January 1, 2026, the current law will automatically “expire”, resulting in a halving of inheritance tax exemptions.
The following is a review of some important transfer tax planning considerations you should consider in 2022:
- Exemption from gift and inheritance tax. The amount of gift and inheritance tax exemption has increased from $11.7 million per person to $12.06 million per person this year. Married couples can combine the use of each spouse’s exemption, resulting in a combined 2022 exemption amount of $24.12 million (assuming proper planning and choices are made). As noted above, the exemption amount is expected to be reduced to approximately $6 million per person beginning in 2026, in accordance with the Tax Cuts and Jobs Act of 2017. A reduction in the exemption amount could come before 2026 if Democrats are successful in the upcoming midterm elections, as reducing the exemption amount is a priority.
- GST exemption. The Generation Skip Transfer (GST) tax exemption currently follows the gift and inheritance tax exemption and is also indexed to inflation each year. Therefore, the GST exemption amount is now $12.06 million per person. Similar to the gift and estate tax exemption, the GST exemption will be reduced to approximately $6 million in 2026 (if not sooner).
- Annual exclusion. Each year, the Internal Revenue Service allows a donor to transfer a specified amount to a non-charitable donee without using any of the donor’s gifts or the estate tax exemption, known as the “carve-out”. annual”. The annual exclusion is also adjusted for inflation and goes from $15,000 to $16,000 this year. Therefore, a donor can give up to $16,000 to a donee without using the donor’s tax and estate tax exemption. A married couple can combine their annual exclusions and give up to $32,000 to each donee. Annual exclusion gifts are a great way to gradually pass wealth on to the next generation without incurring income or transfer tax.
- Midterm elections. We are in another election year. The midterm election results will likely give Democrats a mandate to stall their tax reform proposals or usher in a Republican majority in one or both houses of Congress, which could lead to further deadlock. If Democrats win seats, tax reform could move quickly. Measures should therefore be taken in the run-up to the elections in order to act quickly when the new Congress is sworn in. For example, consider exploring opportunities to take advantage of your increased exemption now by creating an irrevocable trust. for your spouse and/or your family. By establishing such a trust now, you can quickly fund it later this year depending on the election results.
- Building back better. As noted, President Biden’s “soft” infrastructure plan, the Build Back Better Act, and related tax reforms to fund it have stalled in the Senate. Last fall, the Act included major land transfer tax reforms that would have rewritten the estate planner’s playbook. Specifically, there have been proposals to halve the estate tax exemption, to include the assets of a new “grantor’s trust” in a grantor’s taxable estate, to increase the rates capital appreciation and eliminate valuation discounts for transferred business interests. Much to the relief of many taxpayers (and their advisors), these reforms have since been removed from the Act. The law can still be signed into law, as it only needs a simple majority in the Senate to pass. However, a quick pass in the short term seems unlikely as the focus in Washington has shifted to voting rights.
Finally, as we mark the start of a new year, it’s a great time to confirm your estate plan and beneficiary designations for retirement assets, life insurance and other accounts to ensure that always correspond to your wishes.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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