Changes to Key Estate Tax Planning Numbers in 2022

Transcript of Podcast Episode 161

The last half of 2021 included a whirlwind of activity in Congress, resulting in dizzying rounds of discussions, proposals, counter-proposals, settlements and even more negotiations around the Build Back Better Act (“proposed Act”) championed by President Biden and the Democrat controlled Congress. The slim majorities Democrats held in the House and Senate caused this turmoil because Republicans were universally opposed to the proposed Act and its variations, and a few moderate Democrats had concerns too.

The debates concerning the proposed Act revolved primarily on provisions that would cause tax law changes aimed at increasing taxes on high income and high net worth individuals and families, to create the revenue needed to offset the proposed spending provisions. Included in some of the proposals was a reduction in the estate and gift tax exemption amount (“exemption amount”) from $11.7 million per person (which is a $10 million exemption amount, inflation adjusted) down to approximately $6 million (which is a $5 million exemption amount, inflation adjusted) by the end of 2021. That would have exposed more wealthy individuals and families to estate and gift taxes. Indeed, there were even proposals to reduce the exemption amount down further to $3.5 million.

Interestingly enough, based upon current law, the exemption amount will automatically revert back to $5 million, plus inflation, in 2026, without further Congressional intervention.

2021 ended with a version of the proposed Act that did not contain any changes to the exemption amount. So, 2022 will continue to have a high exemption amount, barring further Congressional action to reduce it, which may still be quite possible.

On November 29, 2021, the IRS published Revenue Procedure 2021-45 which set forth the inflation adjusted numbers for many of the provisions in the Internal Revenue Code for 2022, including the exemption amount. That amount will now be $12.06 million per person. Thus, a married couple will be able to pass to their children and other heirs, at least $24.12 million, without any estate or gift tax consequences with appropriate planning.

In addition to this exemption amount, individuals will also be able to gift a total of $16,000 per year to as many people as they wish. That’s known as the gift tax annual exclusion amount (“gift exclusion amount”). The gift exclusion amount was raised from $15,000 because of inflation adjustments. With proper planning, married couples can thus, give away $32,000 to each of their children or other heirs, each year, without even considering the exemption amount mentioned earlier. Early discussions around the proposed Act would also have affected the gift exclusion amount by limiting its utility.

Given Congressional and Presidential interest in a lower exemption amount, and limiting the use of the gift exclusion amount, wealthy individuals and families should carefully consider their estate tax planning and determine if use of these estate planning tools would be wise given the current political environment. There is always the chance of further legislation that takes away the ability to use the high exemption and gift exclusion amounts.

Of course, as with anything tax-related, you should consult with your own tax and legal advisor to determine how this impacts your unique situation.

This podcast is brought to you by Security Mutual Life Insurance Company of New York…The Company That Cares®, and is designed to provide general information regarding the subject matter covered. The content is believed to be current as of the date of the publication; however, Security Mutual makes no representations, warranties or guarantees, whether express or implied, that the content provided is accurate or complete.