Estate and Gift Tax Planning Tips

2022 Readiness - Estate and Gift Tax Planning Tips

We understand the importance of considering all the Estate and Gift Tax planning options when it comes time to prepare for a new year and a new tax season.

ESTATE AND GIFT TAX

The current, ultra-high estate and gift tax exemptions are due to sunset after 2025 – the Biden tax platform includes reducing these exemption levels to much lower historic norms, possibly before 2025.

The Federal estate and gift tax system has been revised several times over the last 20 years. Prior to the 2001 tax cuts implemented during the Bush administration, the estate and gift tax exemption amount was $675,000. The top marginal rate for estate tax was 55%. Over the next 20 years, the estate/gift tax exemption amounts have increased 20-fold.

STRATEGIES THAT CAN HELP TO MINIMIZE THE ESTATE AND GIFT TAX

• Fully utilize the historically high Lifetime Unified Gift/Estate Tax exemption
  $12.06M in 2022 ($24.12M if MFJ). Will be reduced to $5M (plus indexation) after 2025 and may be reduced to “historic norms” before 2025 under a Biden administration.

• Use the Annual Gift Tax Exclusion amount
  $16K per individual recipient of a gift.

• Charitable gifts of cash
  Gifts of cash to public charities are deductible up to 60% of AGI. The AGI limitation for cash gifts to a Donor Advised Fund remains 60%. All gifts to charity remove the asset permanently from the donor’s estate without estate or gift tax consequences.

• Charitable gifts of appreciated property
  Deductible at Market Value for stocks and real estate, subject to 30% AGI limitation.

• Direct gifts of tuition and medical expenses
  Are never taxable gifts – no limit.

• Inter-generational loans
  These can be made free of gift tax. Interest can be funded using annual gift tax exclusion of $16,000.

TRUST AND PARTNERSHIPS

In March of 2022, the Treasury released its Green Book on revenue raising proposals for 2023. Many of the Trusts and techniques outlined below were mentioned as possible targets for what the Treasury considers tax loopholes. For 2022, these strategies are still effective – any legislative changes (if there are any at all) will only take effect from January 1,2023.

• Qualified Personal Residence Trust
  Compresses the Gift Tax transfer valuation due to carve-out of the right to reside in the property. The donor must survive the trust term to be effective. Gift tax efficient.

• Grantor Retained Annuity Trust
  For those who want asset growth to pass to next generation free of gift/estate tax. Donor transfers assets likely to appreciate to a GRAT but retains an annuity from the assets. The appreciation of the assets while in the Trust goes to donor’s heirs after the Trust term free of Gift/Estate Tax. Gift tax efficient.

• Charitable Remainder Trust (Split Interest)
  Effective vehicles for recognizing gains on appreciated assets tax efficiently. Defers capital gains tax over Trust term, creates an annuity for the donor from Trust assets and allows an up-front tax deduction for the remainder interest going to charity.

• Charitable Lead Trust (Split Interest)
  Charity receives an annuity from Trust during the Trust term. The growth in the trust assets during the life of the Trust can pass to heirs/beneficiaries free of gift tax.

• Family Limited Partnership (FLP)
  For those who wish to transfer business assets to the next generation, FLPs allow a discounted transfer value for Gift tax purposes while still retaining substantial operating control for the donor.

• Irrevocable Life Insurance Trust
  Life insurance proceeds add to the insured’s estate (and estate tax) if owned directly by the decedent. Life insurance contracts should rather be held by a Life Insurance Trust with the insured’s family as beneficiary.

Contact us if you’d like guidance to navigate through these complexities.