August 9, 2022

Take Advantage of Increased Estate Tax Exemption and Gift Tax Exclusions in 2022

Annual gifting is a valuable part of most estate plans. With increased gift and estate tax exclusions in 2022, now is a great time to review your estate plan to make sure you’re taking advantage of ways to lower your taxable estate. Below we cover the details of the current gift tax exclusions, increased exemptions for 2022, the limited application of anti-clawback rules and why you should consider gifting now.

Current Gift Tax Exclusions

  • The first $16,000 of gifts to any person, other than gifts of future interests in property, are non-taxable. Annual gifts were limited to $15,000 per person in 2021.
  • Gifts to a spouse are unlimited
  • Gifts to a non-citizen spouse are limited to $164,000
  • Gifts above the annual exclusion will count against your lifetime exemption and should be reported on a Form 709 gift tax return

Donors may also exclude from annual and lifetime gift tax exemptions:

  • All gifts of payments of tuition made directly to the donee’s educational institution
  • All payments for medical expenses, including medical insurance, paid directly to the donee’s medical or medical insurance provider

Generally, you will only be liable to pay federal gift taxes if your total lifetime gifts exceed the current lifetime exemption.

Increased Exemptions for 2022

Estate, gift and generation-skipping transfer tax lifetime exclusions have also increased for 2022. These exemptions increased from $11.7 million to $12.06 million. A married couple can shield a total of $24.12 million without having to pay any federal estate or gift tax. For a couple who had previously maxed out lifetime gifts, this means that they may now give away another $720,000 in 2022 without gift tax consequences.

Consider Gifting Now

The lifetime exclusion amounts currently remain scheduled to expire on December 31, 2025, which would result in a reduction in the exclusion amounts to $5 million, as adjusted for inflation. However, legislation has been introduced more than once in the past few years to reduce the exemption before the current sunset date. Because of pending legislation, you may want to plan to make large gifts sooner rather than later. The IRS previously clarified that individuals who use their increased exemptions would not face adverse tax consequences when the exclusion amount dropped.

Limited Application of Anti-Clawback Rules

The IRS recently issued new proposed regulations which limit the application of the anti-clawback rules for certain gifts includable in a decedent’s estate. The new regulations state certain assets or rights held by individuals who die after the estate tax exemption amount is reduced will pay estate tax based on the lower exemption amount if they have engaged in the following:

  • Assets in a trust funded by the decedent of which the decedent serves as the trustee with absolute discretion to make distributions
  • A gift by promissory note
  • A residence transferred by the decedent during life in which the decedent retains the right to reside until death
  • Assets in a grantor retained annuity trust (GRAT) created by the decedent where the decedent dies during the annuity period
  • Assets in a grantor retained income trust (GRIT) intentionally created to reserve to the grantor an income interest and to take advantage of the higher basic exclusion amount during the grantor’s lifetime

This heightens the need to review your estate planning before the estate exemption drops. If you currently have any of these plans in place, it’s a good idea to review with your team advisors to see how the proposed regulations can affect your current and future planning. Contact an Anders advisor below to discuss your estate planning options or learn more about Anders Family Wealth and Estate Planning.

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