The estate and gift tax regimes have been permanent and unified since the passage of The American Taxpayer Relief Act of 2012 (the "2012 Act"). In 2017, the Tax Cuts and Jobs Act (the "2017 Act") significantly increased the estate, gift and generation-skipping transfer ("GST") tax exemptions, which is scheduled to continue to be increased for inflation through December 31, 2025. And despite various proposals to lower the estate, gift and GST tax exemptions, none of them were enacted and thus the exemptions will increase for inflation in 2022 as set forth below.
Tax Exemption Inflation Increases for 2022
For 2022 the increases under the 2017 Act are as follows:
Note that the increased exemption is scheduled to sunset on December 31, 2025. Under final regulations issued by the IRS and Treasury, it was clarified that the government will not claw back amounts given away between 2018 and 2025 with respect to someone who dies in 2026 or beyond when the gift and estate tax exemptions are set to return to a $5 million exemption, indexed for inflation, which applied under 2012 Act.
Under current law, these increased exemptions under the 2017 Act create opportunities to make larger lifetime gifts, to leverage more assets through a variety of estate planning techniques (such as a sale to a grantor trust) and to shift income producing assets to individuals such as children or grandchildren who may be in lower income tax brackets and/or reside in states with a low income tax rate or no state income tax.
In particular, those who used substantially all of their exemptions prior to 2018 should consider making additional lifetime gifts to utilize the increased exemptions before they sunset at the end of 2025.
How do these changes affect your existing Proskauer estate planning documents?
Our estate planning documents are drafted to be flexible and, in general, their overall structure remains unaffected by the increased exemption amounts. Still, there may be instances where you will want to update your documents.
It should be noted that while the estate tax exemption is portable among spouses at death, the GST tax exemption is not portable. Also, most states that have separate state estate tax regimes (such as Connecticut, Massachusetts and New York) do not permit portability. This creates an extra level of complication. Use of other estate planning options, such as bypass trusts at the first death of a married couple, may be most useful where these limits on portability are applicable.
Additionally, if you are a married couple and live in a state with a state estate tax (or own real property in a state with a state estate tax, such as Connecticut, Massachusetts or New York), there may be provisions that should be added to your documents which could save state estate taxes at the death of the first spouse.
Exploit the Gift Tax Annual Exclusion Amount
In 2022, the gift tax annual exclusion amount per donee will increase to $16,000 for gifts made by an individual and $32,000 for gifts made by a married couple who agree to "split" their gifts.
There is plenty of time to take advantage of your remaining 2021 gift tax exclusion amount, being $15,000 for gifts made by an individual and $30,000 for gifts made by a married couple who agree to "split" their gifts, but in all cases, you should ensure that gifts are "completed" before December 31, 2021.
In lieu of cash gifts, consider gifting securities or interests in privately held companies or other family-owned entities. The assets that you give away now may be worth significantly less than they once were, and their value hopefully will increase in the future. So the $30,000 gift that your spouse and you make in 2021 (and the $32,000 gift that your spouse and you make in 2022) may have a built-in discount that the Internal Revenue Service cannot reasonably question. That discount will inure to the benefit of your beneficiaries if the value of those assets rises.
Your annual exclusion gifts may be made directly to your beneficiaries or to trusts that you establish for their benefit. It is important to note, however, that gifts to trusts will not qualify for the gift tax annual exclusion unless the beneficiaries have certain limited rights to the gifted assets (commonly known as "Crummey" withdrawal powers). If you have created a trust that contains beneficiary withdrawal powers, it is essential that your Trustees send Crummey letters to the beneficiaries whenever you (or anyone else) make a trust contribution. For a more detailed explanation of Crummey withdrawal powers, please see Crummey Withdrawal Notices – Recommended Practices.
If you have created an insurance trust, remember that any amounts contributed to the trust to pay insurance premiums are considered additions to the trust. As a result, the Trustees should send Crummey letters to the beneficiaries to notify them of their withdrawal rights over these contributions. Without these letters, transfers to the trust will not qualify for the gift tax annual exclusion.
2021 Gift Tax Returns
Gift tax returns for gifts that you made in 2021 are due on April 15, 2022. You can extend the due date to October 15, 2022 on a timely filed request for an automatic extension of time to file your 2021 income tax return, which also extends the time to file your gift tax return. If you created a trust in 2021, you should direct your accountant to elect to have your GST tax exemption either allocated or not allocated, as the case may be, to contributions to that trust. It is critical that you not overlook that step, which must be taken even if your gifts do not exceed the annual gift tax exclusion and would, therefore, not otherwise require the filing of a gift tax return.
On January 1, 2018, the New Jersey State estate tax was eliminated altogether.
New Jersey passed a law in fall of 2017 which significantly altered its estate tax for the apparent purpose of preventing the exodus of wealthy individuals. The law increased the New Jersey estate tax exemption, which was previously $675,000 per person, to $2,000,000 per person as of January 1, 2017. There is no New Jersey estate tax for New Jersey residents dying after January 1, 2018.
It is important to note that New Jersey's inheritance tax has not been repealed by this law. Inheritances to spouses, children and grandchildren are not subject to New Jersey's inheritance tax. But the New Jersey inheritance tax is levied on inheritances passing to siblings, nieces, nephews and other unrelated individuals so bequests to certain beneficiaries may still be subject to inheritance tax despite the changes to New Jersey's estate tax.
As of January 1, 2022, the amount of property that will be able to pass free of New York State estate tax will increase to approximately $6,020,000. Almost eight years ago, the New York State legislature passed, and the then New York Governor Andrew M. Cuomo signed, the Executive Budget for 2014-2015, which significantly altered New York's estate tax. The changes to the New York estate tax were made for the ostensible purpose of preventing the exodus of wealth individuals from New York to more tax-favored jurisdictions, but the law will likely not have the desired effect.
The law increased the New York basic exclusion amount, which was previously $1 million per person. This increase was gradually made through January 1, 2019, after which the New York basic exclusion amount is equal to the federal exemption amount under The American Taxpayer Relief Act of 2012 (the "2012 Act"), but without regard to the Tax Cuts and Jobs Act of 2017.
One of the most significant provisions in the law, however, is that no New York basic exclusion amount will be available for estates valued at more than 105% of the New York basic exclusion amount. In other words, New York estate tax will be imposed on the entire estate if the estate exceeds the exemption amount. Due to adjustments to the bracket structure in the new law, those estates that are valued at more than 105% of the New York basic exclusion amount will pay the same tax as they would have under the prior law.
For example, assume a person dies as a New York domiciliary on May 1, 2022, with an estate valued at $6.4 million and when the New York basic exclusion amount will be approximately $6,020,000. Because the value of the estate exceeds 105% of the then available New York basic exclusion amount ($6,020,000 x 105% = $6,321,000), the estate will be subject to New York estate tax on the entire $6.4 million. The New York State estate tax bill will be $561,200, which is the same as the amount that would have been due under the old law. In contrast, if an individual had died with an estate valued at $6 million, her estate would owe no New York estate tax under the new law because the New York basic exclusion amount will be applied to her estate. Under the old law, however, the decedent's estate would still have owed $510,800 in New York estate tax.
A significant change in New York law involves certain gifts made during a decedent's lifetime. New York has no gift tax. Prior to 2014, lifetime gifts were not subject to gift tax or included in the New York gross estate. Under the new law, gifts made within three years of a decedent's death were added back, increasing the New York gross estate, and thus potentially being subject to New York estate tax at a maximum rate of 16%. This was scheduled to sunset in 2019, but it was extended through 2026 as part of the New York Fiscal Year 2020 Budget.
However, the add back does not include gifts made (a) before April 1, 2014, (b) between January 1, 2019 and January 15, 2019, (c) on or after January 1, 2026, or (d) gifts made during a time when the decedent was not a resident of New York State. Moreover, since New York does not have a gift tax, it is usually more beneficial for New Yorkers to give away assets during their lifetimes in order to potentially avoid New York estate tax attributable to those assets at their deaths.
These changes in New York law present further estate planning opportunities using bypass trusts to set aside New York's basic exclusion amount (approximately $6,020,000 after January 1, 2022 and before January 1, 2023 for New York State estate tax purposes). The proper disposition of the basic exclusion amount is the cornerstone of estate planning for married couples. Significant tax savings can be achieved if the basic exclusion amount is set aside at the death of the first spouse, therefore "bypassing" estate taxation at the death to the surviving spouse. In addition, any growth that occurs in the trust also escapes estate taxation at the death of the surviving spouse.
As New York's basic exclusion amount rises, the potential tax benefits from employing bypass trusts increase as well.
Connecticut Raises Basic Exclusion Amount Passing Free From Estate and Gift Tax to $9,100,000 in 2022
As of January 1, 2022, the Connecticut basic exclusion amount increases to $9,100,000 per person (up from $7,100,000 per person in 2021). Beginning in 2023, the Connecticut basic exclusion amount is set to equal the federal exemption amount.
The increased Connecticut basic exclusion amount increases the potential tax benefits from employing bypass trusts in estate plans. The proper disposition of the basic exclusion amount is the cornerstone of estate planning for married couples. Significant tax savings can be achieved if the basic exclusion amount is set aside at the death of the first spouse, therefore "bypassing" estate taxation at death to the surviving spouse. In addition, any growth that occurs in the trust also escapes estate taxation at the death of the surviving spouse.
The increased Connecticut basic exclusion amount also provides additional opportunities for lifetime gifting. In light of the uncertainty of the future of the federal exemption amount under the new administration, there could be benefits to using the increased Connecticut basic exclusion amount prior to death.
If you are the owner of a traditional IRA, you must begin to receive required minimum distributions ("RMDs") from your IRA and, subject to narrow exceptions, other retirement plans, by April 1 of the year after the year in which you turn 72. Previously the starting age was 70 ½. You must receive those distributions by December 31 of each year. If you are the current beneficiary of an inherited IRA, you must take RMDs by December 31 of each year regardless of your age. The RMDs must be separately calculated for each retirement account that you own, and you, not the financial institution at which your account is held, are ultimately responsible for making the correct calculations. The penalty for not withdrawing your RMD by December 31 of each year is an additional 50% tax on the amount that should have been withdrawn.