The Status of Estate and Gift Taxes in 2022
In 2021, Congress, as well as the Executive branch, proposed revisions to the tax code that if passed would have substantially changed estate planning. If these changes had been made, some proposals would have been put on the side, while the frequency of use for other estate planning strategies would have increased.
Some estate planning proposals would have lowered the amount of estate and gift tax exemptions from the current level of $12.06 million a taxpayer to around half the amount. While no guarantee exists that such changes will be made at any time in the future, those interested in making the most of their estate plan should still understand how the law is written as well as what steps they can take to anticipate these looming changes.
Even without any Congressional action, existing taw regulations will expire eventually and thresholds will be substantially reduced in 2026. This change will leave estate and gift taxes at $5 million.
As a result, it’s critical to appreciate the existing values as well as average return rates for assets. Many people are shocked to learn that even with modest return rates, their net worth could double in a decade. If an estate tax exemption is substantially reduced in 2026 and increases with inflation at a rate of 2.5 percent a year, an individual could quickly discover themselves in danger of paying substantial estate taxes.
Understanding the Landscape of 2022
Due to the current uncertainty that exists around estate and gift taxes, attempting to predict the future and decide on what strategies would make the most of your assets is challenging. Understanding the landscape of proposed estate planning changes can be valuable in appreciating what lies ahead. Some of the other estate planning proposals that have been made include:
- Erasing utilizing irrevocable life insurance as well as other types of grantor trusts
- Treating transfers of appreciated property as a sale of the property
- Taxing capital gains as ordinary incomes for individuals who earn over $1 million a year
- Increasing the top income tax rates
Utilizing Defective Grantor Trusts
One technique that can be utilized is to gift assets to make intentionally defective grantor trusts. A person can use grantor trusts to treat trust income as their own which means tax payment will represent a gift to the trust. A grantor trust lets a person sell appreciating or income-generating assets to the trust in return for promissory notes. These transactions are often overlooked for income tax purposes.
For married individuals, spousal access trusts are one type of intentionally defective grantor trusts created to benefit a spouse. A trustee can make distributions to beneficiaries, which can benefit the creator of the trust indirectly.