2022 Estate Planning Update

By: Randall A. Denha, J.D., LL.M.

Now is a great time to review and consult with your estate planning attorney to assess changes in your circumstances.  High net worth individuals who have not made lifetime gifts may want to consider taking advantage of the increased exemptions in case Congress revisits this legislation and certainly in advance of the 2025 change.  Keep in mind estate planning involves more than minimizing taxes, it’s about prudent planning for your family (and charity) to further your personal objectives.

After months of speculation and back and forth, 2022 began with no new federal estate and gift tax legislation.  As the proposed legislation made its way through the legislative process in 2021, the major proposed changes to federal estate and gift tax law never materialized.  Many changes were threatened and expected, such as a significant reduction in the federal estate and gift tax exemption, different tax treatment of grantor trusts, and elimination of the step-up in basis for appreciated assets at death. Thankfully, they all failed, but could soon be revisited. While we do not have any credible reports that these changes will be revisited soon – at least not at the beginning of 2022.  But, of course, there is no guarantee.  Any of these changes can re-surface in some form in the future. 

One important future development—enacted in 2017— is now only three years away.  After 2025, the federal estate and gift tax exemption will be cut from more than $12,000,000 to $5,000,000 per individual (plus an inflation adjustment between 2018 and 2025).

Despite all of the lurking uncertainty, there are some positive developments for taxpayers beginning in 2022. They include:

• Increase in the Annual Gift Tax Exclusion. Due to an adjustment for inflation, annual tax-free gifts by an individual in 2022 increase to $16,000 per gift recipient, and $32,000 by a married couple.
• Increase in the Federal Estate and Gift Tax Exemption. The new federal estate and gift tax exemption beginning for 2022 increases to $12,060,000 per person, due to the inflation adjustment.
• Required Minimum Distributions (RMD) From Qualified Retirement Plans and IRAs. Changes in the life expectancy tables will result in lower required annual distributions from qualified retirement plans and IRAs in 2022.  This benefits taxpayers because the lower distribution will result in less taxable income and helps to continue to preserve and grow the principal of the account under favorable market conditions.
• High earners and Roth IRA conversions. Since the proposals to limit Roth IRA conversions have not been enacted, the loophole known as a “back door” Roth IRA has not yet been eliminated. Using this technique, high earners who are otherwise barred from contributions to a Roth IRA and who do not have a traditional IRA may use after-tax money and establish a traditional IRA, and then immediately convert to a Roth IRA with no or minimal tax consequences.  It’s uncertain if future legislation barring this technique will be retroactive to January 1 or some other date. For those considering this planning, completing it sooner rather than later may be beneficial.

All of the above notwithstanding, these new increased exemptions provide tremendous opportunities through the use of effective and efficient estate planning gift strategies such as:

• Lifetime QTIPs can equalize estates in order to save gift and estate taxes and to maximize creditor protection for the donor, donee spouse, and their children, while allowing the donor to control the ultimate disposition of trust assets.
• Dynasty Trusts, which provide generations of protection from creditors’ claims, divorce claims, and future federal estate taxes and state estate taxes.
• SLATs (Spousal Lifetime Access Trusts), which protect assets from future estate taxes while retaining those assets for use in your generation before such assets pass to children and grandchildren.
• GRATs (Grantor Retained Annuity Trusts), which allow gift tax free transfers of assets to the next generation.
• ILITs (Irrevocable Life Insurance Trusts), which protect life insurance proceeds from federal estate taxes and any state estate taxes.
• CLATs (Charitable Lead Annuity Trusts), which provide for both a charitable income tax deduction and a gift tax efficient transfer of assets to the next generation.

In addition to the above often used techniques and their effectiveness when used early and often, our low interest rate environment, favorable valuation climate coupled with the lowest “AFRs” (“Applicable Federal Rates” — minimum rates of interest that must be used in certain estate planning and other transactions) serves to only enhance the benefits of this type of generational legacy planning. With the increase in inflation, the AFRs may also increase, which can be detrimental to the implementation of the most effective estate planning. So, moving forward prior to any big increases in the AFRs will result in benefits for generations to come.