The transfer tax looks a little different in 2022.
Taxes are not constant.
Sometimes the laws are updated by both the state and the federal taxing authorities.
Other times, the thresholds and amounts are influenced by inflation.
According to a recent Forbes article titled “2022 Transfer Tax Update,” both may apply to the transfer tax in 2022.
Several proposals were made to adjust the transfer tax but were not enacted last year.
Even so, these proposals may become law in 2022.
In general, these will decrease the exemptions available to Americans.
Until then, the exemption amounts have increased in 2022.
What are they?
The federal estate tax exemption, the generation-skipping transfer tax exemption threshold, and the lifetime gift tax exemption are now $12,060,000.
The top federal tax rate for amounts in excess of these thresholds is 40 percent.
Additionally, the annual gift tax exclusion has risen to $16,000 in 2022.
Although the federal exemptions revert back to $5 million plus adjustments for inflation in 2026, this could happen far sooner if proposed legislation is passed.
What would happen if you died in 2026 or later but made gifts in accordance with the current exemption limits?
At this time, the Treasury Department and the IRS both state they would not attempt to penalize gifts made between 2018 and 2025.
What does this mean?
Taking advantage of these exemptions now is ideal.
There are several ways to do so now and thereby decrease the transfer tax your estate will owe later.
One option is to gift income-generating assets to loved ones who have a smaller income or who live in states with no or little income tax.
What can you do if you have already used all of your prior exemptions?
You can make gifts to cover the difference between the $11.7 million 2021 exemption and the $12,060,000 exemption for 2022.
Essentially, you can gift another $360,000 this year.
It is important to note the generation-skipping transfer tax is not available when employing “portability” to effect estate tax savings between spouses.
Additionally, some states do not allow for portability of the estate tax exemption.
These states include Connecticut, New York, and Massachusetts.
With the annual gift tax exclusion at $16,000 for individuals, married couples can gift up to $32,000.
Gifting securities of interests in family entities or privately held companies can be wise.
If the assets have decreased in value and they increase in the future, you would have been able to transfer more without using as much of your exemption.
Because laws change relatively frequently, it is wise to review and update your estate plan if it has been at least two or three years since you created it or last revisited it.
Even if laws have not changed, your family circumstances may have shifted.
Discuss your concerns regarding the transfer tax and your goals for your estate with your experienced estate planning attorney to create a plan to meet your needs.
Reference: Forbes (Jan. 4, 2022) “2022 Transfer Tax Update”