The new year offers a good time to review your existing estate plan against the tax policy landscape and your long-term wealth transfer goals.

Another year, another state of tax limbo: More than a year after President Biden outlined key tax policy proposals, taxpayers are still waiting for clarity on legislation. But regardless of current proposed changes, as history shows, tax rates will continue to shift with political climates, yet tax planning must — and should — go on. 

With that in mind, now is a good time to review 2022 tax changes, as they stand under current law, and consider any planning options you may want to discuss with your advisors. For example, one area that continues to warrant particular attention is the estate tax exemption, which remains significantly elevated but will be cut roughly in half in 2026, even without changes to current tax law.

To help you with these planning discussions, below are the updated gift, estate and generation-skipping transfer tax exemptions (the unified credit), and annual gift tax exclusion amounts for 2022.

2022 Tax Updates

  • The unified credit will increase to $12.06 million for an individual (from $11.7 million in 2021). This means that a married couple will have $24.12 million of available exemption (up from $23.4 million in 2021). 
  • The annual gift tax exclusion will increase to $16,000 (from $15,000 in 2021). As a result, individuals will be able to give $16,000 per year ($32,000 for a married couple) to any number of persons (or trusts) tax free.
  • The top federal estate tax rate remains at 40%, and the top federal income tax rate for estates and non-grantor trusts remains at 37%.

Tax Policy Changes Still Under Debate

It is important to note that the legislation pending in Congress may affect these adjusted figures for 2022, so you should consult with your advisors to determine how to proceed with your planning this year. The Build Back Better Act was passed in the House of Representatives on November 19, 2021, and is being debated in the Senate. At present, we are not aware of any significant adjustments to the estate and gift tax laws being included in the bill. However, proposed changes to individual income taxes are included and would impose surcharges on high income individuals with a modified adjusted gross income greater than $10 million. As it stands, the act would also extend child tax credits through 2022, limit contributions to IRAs larger than $10 million, accelerate RMDs for such accounts, and raise the cap on the state and local tax (SALT) deduction to $80,000.

The Still-Reigning Estate Tax Regime

As a reminder, the Infrastructure Investment and Jobs Act, which was signed into law by President Biden on November 15, 2021, did not include any of the initially proposed changes to the current estate tax regime. Therefore, we are still operating under the following rules:

  • As previously mentioned, the federal estate tax rate remains at 40% for 2022.
  • The step-up in basis at death remains in effect.
  • Income tax is realized at the time of sale, not a “deemed realization” at the time of transfer.
  • Valuation discounts for closely held entities holding nonbusiness assets remain possible.
  • Intentionally defective grantor trusts as estate tax reduction vehicles remain available.

Contact Your Financial Advisor

Estate planning opportunities are available in 2022, particularly given the variables mentioned above — temporarily high estate exemption amounts and policy changes yet to come. Contact your financial advisor today for help coordinating a review of your current estate plan considering the tax landscape and your long-term planning goals.

Article provided by Hightower Advisors. Written by By David Work, Managing Director and Head of Estate and Financial Planning at Hightower Advisors.

Hightower Advisors, LLC is an SEC registered investment advisor. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.