New Federal Transfer Tax Rules for 2022

The Internal Revenue Service has announced the annual inflation adjustments for the 2022 tax year:

2022

Gift and Estate Tax Exclusion $12,060,000

GST Tax Exemption $12,060,000

Gift Tax Annual Exclusion $16,000

Annual Exclusion for Gifts to Noncitizen Spouse $164,000

Federal applicable gift and estate tax exclusion are increasing to $12,060,000: Beginning on January 1, 2022, an individual may give up to $12,060,000 (increased from $11,700,000 in 2018) during life or at death without incurring any federal gift or estate tax. This amount will automatically reduce back to approximately $5,000,000 (adjusted for inflation) in 2026. Married couples may give up to $24,120,000 (increased from $22,700,000 in 2021). There is no North Carolina, South Carolina, Tennessee, or Florida estate or gift tax. Federal gift and estate taxes are assessed at a flat rate of 40% above that exemption amount or if the exclusion is not available.

GST tax exemption increasing to $12,060,000: As of January 1, 2022, an individual may transfer up to $12,060,000 (increased from $11,700,000 in 2021) during life or at death without triggering the generation-skipping transfer (GST) tax. The GST tax is an additional, flat tax assessed at the highest applicable federal estate tax rate (currently 40%) on transfers to persons two or more generations below the donor (i.e., to grandchildren or more remote descendants). As with the unified gift and estate tax exclusion, the GST tax exemption amount is set to be reduced back to approximately $5,000,000 (adjusted for inflation) in 2026.

Gift tax annual exclusion increasing to $16,000: In 2022, an individual donor may make annual gifts of up to $16,000 per recipient without incurring gift or GST tax, and without using any of the donor’s federal unified gift and estate tax exclusion or GST tax exemption. Married couples may make annual exclusion gifts in 2022 of up to $32,000 per recipient, treating gifts made to third parties as if each spouse had made one-half. For example, if a married couple has three children and five grandchildren, they may transfer $256,000 in 2022 to their descendants without touching their combined $24.12 million gift tax exemption, thus allowing them to transfer further substantial assets gift-tax-free.

Annual exclusion for gifts to noncitizen spouse increasing to $164,000: The annual exclusion for gifts made in 2022 to a spouse who is not a United States citizen will be $164,000 (increased from $159,000 in 2021). Generally, spouses who are both US citizens may transfer unlimited amounts to each other without incurring any gift tax, but gifts to a non-US citizen spouse are limited.

Planning Opportunity: We urge clients to consider making lifetime gifts now to lock in use of the current exclusion amount – the highest exclusion amounts ever – while it lasts. As mentioned above, the currently high gift, estate, and GST tax exclusion amounts are set to “sunset” in 2026 back to approximately $5,000,000 (adjusted for inflation). While legislation seeking to accelerate that reduction was floated but not enacted in 2021, such legislation may be enacted in 2022.

There are many ways to make gifts. Gifts may be made outright, to an irrevocable trust, or may take other forms, such as the forgiveness of intra-family loans. The best gifts made while the donor is living (inter vivos gifts) are usually cash or high-basis assets, as the recipient of a lifetime gift takes the donor’s cost basis for capital gain purposes, while the recipient of a gift from a decedent’s estate receives a new cost basis equal to the fair market value as of the donor’s date of death; this is commonly referred to as a “step-up” in income tax basis.

It is even possible to make gifts to spouses in trust so that the gifted assets are available to the family unit or to make gifts to a trust in certain states where the donor is a permitted beneficiary or can be added as a permitted beneficiary.

Strauss Attorneys, PLLC has attorneys licensed to practice in North Carolina, South Carolina, Tennessee, and Florida.

To discuss how to take advantage of the planning opportunities available to you, you can schedule an appointment at our Asheville office at 828-515-1810, or to make an appointment with our Hendersonville office call 828-696-1811. We now also have our newest location in Raleigh, North Carolina. To make an appointment with our Raleigh team, call 828-258-0994.