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Switch Tax Planning Concerns for 2022 – Taxes

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Transfer tax planning considerations for 2022

January 24, 2022

Reinhart Borner Van Deuren sc

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Several proposals were tabled in Congress last year that would have significantly changed transfer tax planning for wealthy individuals and business owners. The proposals failed because of the wafer-thin majority of the Democrats in Congress. Even if there are no changes in the short term, the current law will automatically “go away” on January 1, 2026, which will lead to a halving of inheritance tax exemptions.

The following is an overview of some key transfer tax planning considerations to keep in mind in 2022:

  1. Gift and Inheritance Tax Exemption. The gift and inheritance tax allowance was increased this year from $11.7 million per person to $12.06 million per person. Married couples can combine each spouse’s time off, resulting in a total time off amount of $24.12 million in 2022 (assuming proper planning and elections are conducted). As mentioned above, the Tax Cuts and Jobs Act of 2017 plans to reduce the allowance to approximately $6 million per person from 2026. A tax exemption reduction may come before 2026 if Democrats do well in the upcoming midterm elections, as tax exemption reduction is a priority.
  1. GST Tax Exemption. The Generation Skipping Transfer (GST) tax exemption currently follows the gift and estate tax exemption and is also indexed for inflation each year. Accordingly, the GST tax exemption amount is now $12.06 million per person. Similar to the gift and estate tax exemption, the GST tax exemption will be reduced to approximately $6 million in 2026 (if not sooner).
  1. Annual Exclusion. Each year, the Internal Revenue Service allows a donor to give a specified amount to a non-charitable recipient without taking advantage of the donor’s gift or estate tax exemption, known as an “annual exclusion.” The annual exclusion is also adjusted for inflation, increasing from $15,000 to $16,000 this year. Therefore, a donor can give a gift recipient up to US$16,000 without claiming the donor’s gift and estate tax exemption. A couple can combine their annual exclusions and give each gift recipient up to $32,000. Annual exclusion gifts are a great way to gradually pass wealth on to the next generation without incurring income or transfer taxes.
  1. midterm elections. We are in another election year. Midterm election results are likely to either give Democrats a mandate to push through their stalled tax reform proposals or usher in a Republican majority in one or both houses of Congress, potentially leading to another deadlock. If the Democrats win seats, tax reform can move quickly, so steps should be taken as the election approaches to act quickly when the new Congress is sworn in. For example, consider exploring ways to use your increased deliverance now by creating an irrevocable trust in your spouse and/or family. By starting such a trust now, you can fund it quickly later this year depending on the election results.
  1. Better rebuild. As noted, President Biden’s “soft” infrastructure plan, Build Back Better Act, and related tax reforms to fund it have stalled in the Senate. Last fall, the law contained some significant transfer tax reforms that would have rewritten the estate planner’s playbook. In particular, proposals have been made to halve the inheritance tax exemption, include assets within a new grantor trust in a grantor’s taxable assets, increase capital gains rates and eliminate haircuts for transferred shares. To the relief of many taxpayers (and their advisors), these reforms have since been scrapped from the law. The bill can still be enacted as it only requires a simple majority in the Senate to pass. However, a quick passage in the near future seems unlikely as the focus in Washington has shifted to voting rights.

Finally, as we mark the beginning of a new year, now is a good time to confirm your estate plan and beneficiary designations on retirement savings, life insurance, and other accounts to ensure they still match your desires.

The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.

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