Tax planning should be an essential component in every comprehensive estate plan to ensure that the assets you acquire are not unnecessarily lost to state and federal taxes. While considerable uncertainty surrounding legislative action on the Build Back Better Plan remains for 2022, we offer some updated tax advice and relevant figures for 2022. If you have specific questions, please contact us at Amato Law, PLLC discuss your concerns.
Annual Exclusion Gifts
- Exclusion Amount. For 2022, the annual gift exclusion increased from $15,000 to $16,000 per donee, and from $30,000 to $32,000 for a married couple per donee. The limitation on gifts to non-citizen spouses increased to $164,000 from $159,000.
- Crummey Notice Gifts. Contributions to 529 college savings plans and transfers to insurance Trusts and other inter vivos Trusts that are subject to “Crummey” powers of withdrawal count toward a donor’s total gifts to the donee for that year. For example, if a single donor contributes $3,000 to a 529 plan for a child in 2022, the maximum remaining annual exclusion amount the donor may gift that child for 2022 will be $13,000. Gifts that exceed the annual exclusion amount will constitute taxable gifts and will reduce the donor’s lifetime exemption amount. A donor may make five years of annual exclusion contributions to a 529 plan at one time without reducing the lifetime exemption; however, a gift tax return must be filed to report the gift. Trustees should make sure that Crummey notices are up to date, sent to the Crummey power holders in a timely fashion, and copies of the notices kept with the Trust records.
- Direct Payments. Direct payments for tuition, medical expenses, and health insurance premiums for a donee do not count toward the annual exclusion amount for that donee. As such, they do not reduce the donor’s lifetime exclusion amount.
Federal Estate, Gift, and Generation-Skipping Transfer Taxes
- Exemption Amount. For 2022 the federal gift, estate, and generation-skipping transfer tax exemption increased from $11,700,000 to $12,060,000 per individual and from $23,400,000 to $24,120,000 for married couples.
- Tax Rate. The maximum rate for estate gift and generation-skipping transfer taxes remains at 40 percent unless there is a change by Congress.
- Portability. The portability of a deceased spouse’s unused estate tax exemption (but not generation-skipping transfer tax exemption) to the surviving spouse remains in effect.
- Sunset Provision. The current exemption is based on legislation that substantially raised the yearly lifetime exemption amount starting in 2018; however, that law includes a sunset provision that automatically reverts the exemption amount to the previous lifetime exemption amount of $5 million (indexed for inflation from 2010) on December 31, 2025.
- Claw–Back and Unused Exemptions. In November 2019, the Treasury Department issued final regulations to reassure taxpayers that there would be no claw-back of the exemption should a taxpayer make gifts exceeding the pre-2017 exemption amount and then die following the sunset of the 2017 Tax Act. Taxpayers who do not fully utilize their increased exemptions through lifetime gifts, however, may lose the additional exemptions following the sunset of the 2017 Tax Act.
- Non–Resident Aliens. The exemption for nonresident aliens remains at $60,000 in the absence of an estate tax treaty.
State Estate and Gift Taxes
- New York Estate Tax Exemption Amount. New York’s exemption from estate tax increased from $5,930,000 to $6,020,000 for 2022. The exemption does not apply, however, to estates worth more than 105% of the New York exemption, meaning the entire estate is subject to the tax.
- Portability. New York does not provide for the portability of a deceased spouse’s unused estate tax exemption.
- Gift Tax. New York has no gift tax but currently does include gifts made within three years of death in the estates of New York resident decedents who die on or between January 16, 2019, and December 31, 2025.
- New Jersey Gift, Estate, and Inheritance Tax. New Jersey’s estate tax was repealed for decedents dying on or after January 1, 2018. New Jersey does not have a gift tax, but it does impose an inheritance tax on transfers to collateral relatives, including siblings, nieces, nephews, and unrelated individuals.
- Connecticut Gift and Estate Tax. Applicability of Connecticut’s estate and gift tax applies to aggregate gifts exceeding $9,100,000, with a top tax rate of 12 percent for 2022. In 2023, the exemption will match the federal exemption.
If you do not already have an irrevocable life insurance Trust (ILIT) in place, consider establishing one. Proceeds of a life insurance policy that is owned by an ILIT avoid inclusion on your estate assets and, therefore, are not taxable for federal gift and estate tax purposes.
The 2017 Tax Act expanded the federal income tax benefits of 529 Plans by allowing qualified withdrawals of up to $10,000 for tuition for K-12 education. Since each state has its own law concerning 529 Plans, you should confer with your tax advisor as a withdrawal of $10,000 for K-12 education may not be exempt for state income tax purposes.
If you have not yet done so, consider naming a successor owner for any 529 college savings accounts that you have created.
It is also important to name a successor custodian of Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts. If you are the donor to a UTMA or UGMA account, you should not be the custodian because that makes the account part of your taxable estate if you should die prior to the child’s attainment of the age of majority.
The estate planning attorney at Amato Law, PLLC looks forward to helping you incorporate tax planning into your comprehensive estate plan. Contact our office today by calling 212-355-5255 or filling out our online contact form.