For 2022, the Internal Revenue Service increased the federal estate and gift tax lifetime exemptions to $12,060,000 per person ($24,120,000 million for a couple). This means that an individual’s estate will not be taxed by the federal government if it is within those limits. Therefore, a couple with assets of under $24.12 million will not have a federal estate tax imposed on their collective estate provided proper planning is done. Further, a gift tax will not be imposed if lifetime gifts are made within those limits.
This increase means that a married couple can now shield a total of $24.12 million without having to pay any federal estate or gift tax. The Biden administration had seriously considered reducing the exemption to $3,500,000, but this proposal was not enacted into law.
Although the President’s proposals did not become law, individuals should engage in planning as soon as possible to maximize gift and estate tax savings. Firstly, the proposals reducing the estate tax exemption may be enacted in the future. Further, the federal estate tax exemption is due to sunset in December 2025 and the exemption will revert back to $5,000,000 with adjustments for inflation.
After four years of being at $15,000, the exclusion has now been increased to
$16,000 per recipient for 2022. This means that an individual can make a gift of up to $16,000 to an unlimited number of people without have to file a gift tax return. Married couples can give $32,000/year per recipient. As an example, if a married couple has four children and four grandchildren, they may gift $256,000 in 2022 to these family members without affecting their combined $24.12 million estate/gift tax exemption, thus allowing them to transfer substantial assets gift-tax-free.
Many of our clients still believe that they can gift only the annual exclusion amount (currently $16,000 per recipient), but these annual exclusion gifts can be made over and above the aforementioned $12.06 million federal exemption limit. In other words, annual exclusion gifts of $16,000 or less per recipient per calendar year do not use up any of the lifetime allowances.
When making gifts, it is important to take into consideration appreciation of the gifted assets, which can result in significant capital gains tax (income tax) upon the recipient’s sale of gifted assets. A competent estate planning attorney will conduct a comprehensive cost/benefit analysis of capital gains and estate taxes and will devise an appropriate plan.
Federal tax rules are different than that of New York State. New York State does not currently impose a gift tax, but any gifts made within the three years immediately prior to death will be brought back into the estate (“claw back”). Also, even though New York does not impose a gift tax, remember that any gifts over $16,000 per recipient per year will count toward the allowable federal allowance of $12.06 million. In other words, one would have to gift over that amount in order to incur gift tax.
As far as estate tax is concerned, New York’s estate tax exclusion amount is $6,110,000, adjusted annually for inflation. It is very important to keep in mind that if an individual dies with an estate that is more than 5% over the New York estate tax exclusion, New York will impose estate tax on the entire amount of the estate, not just the overage. So, if an individual dies with $6,485,000 or more, the entire $6,485,000 is taxed (not just the $6,110,000).
It is important to review your assets with an estate planning attorney and, depending on your age and life expectancy, evaluate potential appreciation of those assets during your lifetime, consider gifting the assets, and consider executing documents that will minimize or eliminate estate taxes upon your death.
Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Debby Rosenfeld, Esq. is a senior elder law attorney with the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Brightside Advisors, a wealth management firm with offices in New York and Los Angeles.
By Ronald Fatoullah, Esq. and Debby Rosenfeld, Esq.