Generations Estate Tax Summary: The Year Ended the Way It Started

At the start of 2021, I did not antici-pate writing a year-end estate tax summary that ended the year the way it started with no substantial changes to the estate and gift tax. With the incoming Biden administration, there was a great deal of discussion related to a possible decrease in the estate tax exemption, an increase in the estate tax rate, an overhaul or elimination of the step-up in basis for appreciated holdings, the elimination of Grantor Trusts, new limitations on the use of discounting, and other changes to the estate and gift tax. However, as of the writing of this article, it appears that there are no significant changes in the tax rates as we enter 2022. What does this mean going forward?

Currently the estate tax exemption inflation adjustment is set to increase on January 1, 2022, to $12,060,000 per person, meaning that for a married couple the estate tax exemption is double that amount: $24,120,000 can pass estate tax free. However, this exemption is set to sun-set January 1, 2026. Should the sunset occur, the estate tax exemption amount will revert to one-half of that amount, or approximately $6 million in today’s dollars.

In one version of the estate tax legisla-tion that was introduced in September 2021 by the House Ways and Means Committee, the Committee proposed accelerating the sunset to January 1, 2022. While this proposal did not move forward, it was a good reminder of the outcome under current policy. While clients with a net worth in excess of $12 million currently have an estate tax liability, individuals and couples with a net worth of $6 million or more should be mindful
that even without a change in the law, their estates will be subject to estate taxation starting in 2026.

As a result of last year’s political activity, or for some, inactivity, I have come to the conclusion that clients with estates in excess of $12 million may have the luxury of additional time. However, this time should be spent considering how to best leverage the estate tax exemption through gifting, freezing, or other planning options. Clients with a net worth of $6 to $12 million should consider integrating a disclaimer trust provision into their estate plan. Should a spouse pass in an untimely manner, the survivor should also consider leveraging the current estate tax exemption with a portability election (I
wrote an article on portability in the Spring 2021 newsletter). I believe I can say with a fairly high degree of certainty that, given the political machinations in Washington, both sides have showed their cards, and the lowwater mark for the estate tax is the current sunset amount of $5 million indexed to inflation, or approximately $6 million in today’s dollars.

One change to note is the increase in the annual gift tax exemption from $15,000 to $16,000, beginning on January
1, 2022. This means that you can make a gift to someone other than a spouse (for example, a child) up to $16,000 in a calendar year, and the value of the gift does not need to be reported to the IRS on a 709 return. Annual gifting is a powerful wealth transfer tool and should be considered by clients that want to make a gift, either for taxable or non-taxable reasons (Chelsea Riekkola wrote extensively about gifting in the Fall 2021 newsletter). 

For married couples, the current estate tax status quo means ensuring the tax funding clause, if necessary, is periodically reviewed to ensure it meets your planning goals. For now, married couples also receive the continued benefit of the adjustment in basis, typically referred to as the “step-up” in basis, from the Alaska Community Property Agreement. Clients with a large IRA may want to consider leveraging their IRA in a Charitable Remainder Trust in this post SECURE Act environment (I discussed how to leverage a Charitable Remainder Trust in the post SECURE Act environment in the Fall 2020 newsletter). 

The takeaway is that the sound planning tools that have been implemented for years are still the best estate planning tools. However, the window of opportunity to use these techniques may be limited as they face Congressional scrutiny. Therefore, it is worth scheduling a review in order to determine what planning options would make the most sense should 
there be a sudden overhaul in the estate and gift tax.