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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

2022 Estate & Gift Tax Exemption & Exclusion

2022 Estate & Gift Tax Exemption & Exclusion

The real estate planning world, the financial planning world, and parliamentarians considered several significant estates and gift tax changes at the end of 2021. The Biden administration has presented several proposals to pay for the Build Back Better Act. There has been talk of reducing the inheritance and gift tax exemption from $11,700,000.00 (or $23,400,000 for a couple with portability) to just $3,500,000 (or $7,000,000.00 for a couple). Some changes were made to grantor trusts (typically found on irrevocable life insurance policies or qualified residential trusts) and even discussed removing the step-up in basis that would trigger income tax on inherited property. Another blow would be to limit annual gifts to $20,000 per year (instead of $15,000 to as many individuals as the donor wished).

Fortunately, all of the above failed when 2022 arrived. The current estate and gift tax exemption for 2022 is $12,060,000.00 (or $24,120,000 for couples). There is another increase in the inherited property and asset basis, and annual gift limits are higher than ever at $16,000.00 (or $32,000.00 for couples) per beneficiary. Parents can give their five adult children $16,000 for each parent's child (or $32,000 for each child, for a total of $160,000).

The proposed "99.5%" Act never materialized. Grantor trusts retain the same benefits, and the Generation Skip Tax is equivalent to the estate tax exemption levels. With no major changes, now is the time to strike in Estate Planning.

Under current law, inheritance and gift tax exemption levels will be reduced in 2025. If the legislator does not take action to increase the current amounts, the law will reduce the inheritance tax exemption levels and property tax by $5,000,000.00 (indexed to inflation, probably around $6,000,000.00). Additionally, there is still the possibility that the "For 99.5%" law could be revived and passed in the House and Senate to become law before 2025.

If you have taxable or will have a taxable estate, consult your financial advisor and estate planning lawyer to see what planning can be done to provide the highest protection and consideration for your future. We don't recommend protecting all of your assets because we don't know what the future holds, but we do recommend caution and prudent solutions. Even if the "99.5% Act" becomes law, the next government can overturn it later. The best solution is to look at your goals and resources and find the plan that works for you right now and gives you a good perspective on the future. Many techniques can protect assets while providing flexibility.

2022 Annual Adjustments For Tax Provisions

Transfer tax exemption for death transfers, lifetime gifts, and generation-skipping transfers

The annual inflation adjustment for federal gifts, inheritance, and generation-skipping tax exemption has increased from $11.7 million in 2021 to $12.06 million in 2022. For couples, the exclusion is now $24.12 million. The exemption for gifts and property is unified, which means that it includes both taxable life gifts of an individual and taxable property in the event of death. The generation-skipping exemption is a separate threshold and applies to transfers to grandchildren, directly or in trust, and other persons under the age of 37.5 than the transferor.

Unless additional tax legislation is enacted, the higher annual inflation exemption is valid until 2025. Additionally, at the end of 2019, the IRS said that individuals who benefit from the increased tax exemption for gifts until 2025 will not be adversely impacted when the exclusion value is expected to fall to pre-2018 levels.

Other payments excluded from the annual and lifetime gift exemption

The annual gift tax exemption allows taxpayers to give certain gifts without using the lifetime exemption amount. In 2022, the annual gift tax exemption is increased to $16,000 per beneficiary. Gifts to beneficiaries are eligible for the annual exclusion.

If gifts are made through a trust, the trust must be written to include "crummey withdrawal power" to qualify as a current interest gift for the annual exclusion. Crummey's powers give the recipient a limited time, typically 30 or 45 days, to withdraw contributions to a trust, turning the gift of future interest into a gift of present interest. The right of withdrawal is generally limited to an amount equal to the applicable annual gift tax exclusion.

A separate annual tax exemption for gifts to non-citizens is increased to $164,000.

Gift Tax Annual Exclusion

Tuition fees paid directly to the beneficiary's educational institution and medical expenses (including health insurance) to the beneficiary's healthcare provider are excluded from annual and lifetime gift tax exemptions.

The same exemptions apply to gifts to a spouse who is an American citizen and qualifying charities.

What does this mean for you?

Even if your property is not subject to federal estate tax, you or your heirs are not necessarily exempt from liability. Your property may be subject to state property tax. State property tax exemptions are generally much lower than federal property tax exemptions. Additionally, some states charge an estate tax to the heir.

The ever-changing landscape of the federal real estate and gifting laws presents opportunities and planning challenges. Good planning is essential.

Bottom Line

President Biden's Build Back Better Bill is still being drafted in Congress. Meanwhile, the IRS has released its 2022 annual adjustments to various tax provisions.

This includes the following exclusions for gifts, property, and generation-skipping transfers:

  • Transfer tax exemption for lifetime gifts, death transfers, and generation-skipping transfers.

  • Exclusion of annual gift tax 

  • Other payments excluded from the annual and lifetime gift exemption



Jim McClaflin, EA, NTPI Fellow, CTRC
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