Client Quick-Hit Alert -- New Year, New Estate & Gift Tax Exemptions

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Dentons

This new year brings us new Estate & Gift Tax exemptions, as well as new estate planning opportunities.

  • The federal gift & estate tax exemption has increased from $11.7 million in 2021 to $12.06 million in 2022.
  • The New York State estate tax exemption has increased from $5.93 million in 2021 to $6.11 million in 2022.
  • The Connecticut state gift & estate tax exemption has increased from $7.1 million in 2021 to $9.1 million in 2022.

The next dramatic change in the federal estate & gift tax exemption is scheduled for the end of 2025 when certain tax cuts previously enacted are schedule to expire, resulting in a federal gift & estate tax exemption of approximately $5.5 million or so -- however, proposed tax laws circulating through Congress could drastically decrease this exemption to a lower amount prior to the expiration date currently in place.

These new increased exemptions provide tremendous opportunities through the use of effective and efficient estate planning gift strategies such as:

  • 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 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 these tried-and-true estate planning techniques being incredibly effective in and of themselves, the positive 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) in recent memory serve 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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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