The new numbers mean that wealthy taxpayers can transfer more to their heirs tax free during life—or at death. A lot more.
In 2022, the estate and gift tax exemption increases from $11.7 million in 2021 to $12.06 million per individual, according to new inflation-adjusted numbers from the IRS. The gift tax annual exclusion also increases, from $15,000 to $16,000. The IRS announced these numbers, as well as tax brackets, standard deductions and more, as reported in the article “New Higher Estate And Gift Tax Limits for 2022: Couples Can Pass On $720,000 More Tax Free” from Forbes.
The estate tax is 40% on the biggest estates, but wealthy individuals use legal strategies, like transferring wealth to heirs while they are living, making big gifts and also making multiple $16,000 annual exclusion gifts that don’t count against the $12 million lifetime limit.
In 2022, a wealthy person may leave $12.06 million to heirs with no federal estate or gift tax. A married couple may leave $24.12 million. If by some chance a couple has maxed out their lifetime gifts, this latest increase means they have the option to give away another $720,000 in 2022.
A series of annual exclusion gifts of $16,000 can add up, especially when they are done in a planned method over an extended period of time. Since these gifts don’t count toward the $12 million amount, they are especially valuable for managing estate tax liability.
Estate sizes may also be reduced by making direct payments for medical and tuition expenses, for as many people as desired, with no gift or tax consequences. There is no limit on the amount to be paid, as long as these payments are made directly to the institution.
There are any number of ways to take money out of an estate. These include outright gifts, loans to family members and special trusts. A variety of trusts are created to preserve family wealth, from simple to complex trusts used to extend wealth across many generations.
In addition to planning for the increased numbers for 2022, this is also the time to check on basic estate planning documents and be certain they are up to date. These includes a will, any kind of revocable living trust, a durable power of attorney, a healthcare directive and a living will. If the family includes a special needs member or a disabled individual, there are other planning methods to be discussed with an experienced estate planning attorney.
Despite the good news of these increases, the $12 million estate tax exemption will be halved at the start of 2026. The historical high exemption was created under President Donald J. Trump by the 2017 Tax Cuts and Jobs Act, which temporarily doubled the estate tax exemption from 2018 to 2025. While there was a lot of discussion about the Infrastructure Bill and funding through estate taxes, any provisions impacting estate planning were dropped before the bill was passed.
One more reason to gift now: state estate taxes and inheritance taxes are still alive and well in many states. If you live in a state with these taxes, the state tax bite could be just as bad, if not worse, than the federal tax.
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Reference: Forbes (Nov. 11, 2021) “New Higher Estate And Gift Tax Limits for 2022: Couples Can Pass On $720,000 More Tax Free”