What Now? Estate Planning in 2022

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After months of speculation, 2022 began with no new federal estate and gift tax legislation.  As the proposed legislation wended its way through the legislative process in 2021, the major proposed changes to federal estate and gift tax law were dropped.  These aborted changes included 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.

There are no current 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:

  1. 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.
  2. 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.
  3. Increase in Connecticut Estate and Gift Tax Exemption. For residents of Connecticut, the new Connecticut estate and gift tax exemption beginning in 2022 increases to $9,100,000 per person (from $7,100,000 in 2021).
  4. 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.
  5. 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. 

So What Now?

This is an opportune 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.  If you are charitably inclined, you might want to review options for incorporating charitable giving in your estate plan in ways that may also benefit your family.  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.

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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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