New Death Tax, Gift Tax and GST Tax Exemptions in 2022

What are the new tax exclusion amounts for 2022?

The total amount that a US citizen can transfer to another individual free of death, gift, or Generation-Skipping Transfer taxes (collectively, the “transfer taxes”) will increase on January 1, 2022 to a whopping $12,060,000.00 per person or $24,120,000.00 per couple. This is the highest it has been since the tax was enacted in 1916.

These big transfer tax amounts are not permanent. On January 1, 2026 these exemptions will be cut in half. This year Biden “proposed” to cut the exemption in half on January 1, 2022 but it has been dropped from the latest November 3 legislation text.

What do these new numbers mean?

The new number mean that wealthy tax payers can transfer more to their heirs tax free during their life or at death. The gift tax annual exclusion allows taxpayers to make certain gifts without eroding the taxpayer’s lifetime exemption amount. The gift tax annual exclusion in 2022 will also increase to $16,000.00 per donee.

What payments are excluded from the annual and lifetime gift tax exemption?

A donor may exclude from his annual and lifetime gift tax exemption all gifts to his/her spouse as long as the spouse is a US citizen, payments of tuition made directly to the donee’s educational institution and payments for medical expenses (including medical insurance) paid directly to the donee’s medical or medical insurance provider.

What does it mean for you?

The changing landscape of federal transfer taxes has led to many opportunities in estate planning. The death tax is assessed at 40 % on the biggest estates. By transferring wealth to heirs early, the rich can avoid the death tax. They do so by making big gifts, typically in the millions that eat up the $12,060,000.00 exemption amount and by making lots of $16,000.00 annual exclusion amounts, that don’t count against the exclusion amount.

In 2022, an individual can leave $12,060,000.00 to heirs and pay no federal death or gift tax and a married couple can shield $24,120,000.00. For a couple who have already maxed out their lifetime gifts, the higher exemption leaves them room to give another $720,000.00 in 2022.

It is better to make lifetime gifts rather than waiting to die and use the exemption at death because when you  are making lifetime gifts you are really leveraging that exemption amount. For example, make a $5,000,000.00 gift today. Assets worth $5,000,000.00 are out of your estate, and any growth on that amount is also outside of your estate.

You can also give away $16,000.00 to as many individuals (kids, grandkids, their spouses), as you’d like with no federal gift tax consequences. Spouses can make $16,000.00 gifts doubling the impact. A  number of $16,000.00 annual exclusion gifts can add up, and they don’t count towards the $12,060,000.00 exemption amount. We always encourage our clients to make annual exclusion gifts and make those gifts as soon as possible rather than waiting until the end of the year because the appreciation on those gifts are then outside of your estate.

You can also make unlimited direct payments for medical and tuition expenses for as many people as you’d like with no gift or death tax consequences. These can be very powerful.

For the wealthy, making big gifts makes sense. There are many ways to get money out of your estate. Outright gifts, loans, and special trusts are some examples. Regardless of what you decide, check to make sure your estate plan is up to date including your financial power and healthcare proxy.

Call the Trust Doctor (W. Bailey Smith), who has created over 7,000 trusts at (949) 833-8891, TODAY!