2022 TRUST AND ESTATES UPDATES02/07/2022
The federal gift tax exemption amount for gifts made in the year 2022 is $12.06 million per person ($24.12 million for a married couple) up from $11.7 million in 2021. However, the exemption amount will be reduced by approximately one-half on January 1, 2026, if Congress does not act to make the higher exemption amount permanent.
For a married couple that has used the full amount of their lifetime gift tax exemption in 2021, they may now give away another $720,000 in 2022 without incurring federal gift tax. The rate for the federal gift tax remains at 40 percent.
Similarly, the federal estate tax exemption for decedents dying in 2022 is $12.06 million, and the federal estate tax rate is 40 percent.
We will continue to monitor legislative action on capitol hill.
The IRS has announced that the annual gift tax exclusion will increase in 2022 due to inflation and will rise to $16,000 per recipient. This means that an individual can give $16,000 per recipient without using up any of the lifetime gift and estate tax exemption. For married couples, this number is now $32,000 a year per recipient (2 x $16,000).
ANNUAL GIFT TAX EXCLUSION
For example, if a married couple has two children who are married and six grandchildren, they could gift $320,000 in 2022 to their family members without reducing their $24.12 million dollar gift tax exemption, allowing them to transfer substantial assets without being subject to gift tax. An added bonus is that any future appreciation of the gifted assets would occur outside the donor’s estate and will not be subject to federal gift or estate tax.
Spouses who are both citizens of the United States can transfer unlimited amounts to one another without being subject to any gift tax. However, gifts to a non-citizen spouse are not eligible for the unlimited gift tax exemption. Thus, the amount of tax-free gifts to a non-citizen spouse are limited to an annual exclusion amount. In 2022, the annual amount an individual can give to a non-citizen spouse without reducing his or her lifetime gift tax exemption is $164,000.
GIFTS TO A NON-CITIZEN SPOUSE
When an individual makes a gift to a donee who is not his or her spouse, and the amount of the gift exceeds the annual gift tax exclusion ($16,000 in 2022), the donor’s lifetime gift tax exemption ($12.06 million in 2022) is reduced by the excess amount. For example, if an individual makes a gift to his or her child of $100,000 in 2022, that individual must file a gift tax return, due April 15 in the following year, to report the gift and track the amount of the lifetime exemption that has been used. This gift would reduce the donor’s gift and estate tax exemption by $84,000 (the excess of $100,000 over $16,000).
LIFETIME GIFT TAX EXEMPTION
It is important to note that the gift and estate tax laws are unified, meaning that the use of an individual’s gift tax exemption will reduce the amount one may leave to his or her heirs at death free of estate tax.
There are no 2022 changes to the rules regarding so-called step-up in basis for capital assets held at death. This means that when you die, your heirs’ cost basis in such assets you leave them are reset to the value at your date of death rather than the cost basis you purchased them for.
STEP UP IN BASIS AT DEATH FOR CAPITAL GAINS
The Portability Election, which allows a surviving spouse to use his or her deceased spouse’s unused federal estate and gift tax exemption, is unchanged for 2022. This means a married couple can use the full $24.12 million exemption before any federal estate tax would be owed. To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse’s estate.
PORTABILITY FOR FEDERAL ESTATE TAX
The New York State’s estate tax exemption for 2022 is $6,110,000 million. New York State does not recognize portability, so unlike federal law which enables a surviving spouse to make use of the deceased spouse’s unused estate tax exemption, New York law requires some extra planning. As a result, couples who live in New York should make sure their will or revocable trust agreement contains a mechanism, such as a credit shelter trust, to avoid wasting the New York estate tax exemption of the first spouse to die. New York State law also has a three-year lookback on gifts for estate tax purposes, meaning that if an individual dies within three years after making a gift that exceeds the annual exclusion amount, the excess amount will be added to the assets owned on the date of death in determining the amount of the New York estate tax. However, a gift of real or tangible property located outside of New York State is not includable.
NEW YORK ESTATE TAX
The time to plan is always in the present. Life is always changing, and an estate plan is flexible tool which is designed to grow with your family and net worth. Some reasons to take a fresh look at an existing plan or to create your first estate plan are major life cycle events such as a birth, marriage divorce, health care diagnosis or death. In addition to planning to minimize federal and New York State estate taxes, an estate plan may include long-term care planning, planning for a disabled loved one or avoiding probate.
WHEN TO PLAN?
If you have questions or would like more information on the information discussed in this legal alert, please contact one of the attorneys listed below.