2022 Estate & Gift Tax Update
A Legal Moment

2022 Estate & Gift Tax Update

   2022 continues to offer the historically large federal unified exemption amount for bequests and lifetime gift-giving in effect since 2018, and because of this significant change from earlier years, careful review of tax planning provisions in existing estate planning documents is warranted ‒ as well as consideration of lifetime gift planning.

Estate & Gift Tax (and GST) Exemption Amount for 2022

   A little over four years ago, the exemption (or “exclusion”) amount for federal estate, gift, and generation-skipping tax (“GST”) was slated to increase slightly from the prior year, to $5.6 million per person for 2018.   This amount suddenly nearly doubled (to $11.18 million for 2018) when the Tax Cut and Jobs Act of 2017 was enacted.  For 2022, with inflation adjustment, this amount increased to $12.06 million per person (up from $11.7 million in 2021, and potentially offering a $24.12 million exemption for a married couple).  This is the “unified exemption amount” for the sum total of a person’s “lifetime gifts” (gifts in excess of the applicable annual exclusion amounts in effect when the gifts were made), together with the property passing to beneficiaries upon the donor’s death.  This figure also represents the current exemption amount for generating-skipping gifts (e.g., gifts to grandchildren).  Estates (and/or lifetime gifts) in excess of the exemption amount are taxed at a maximum rate of 40%.  Generation-skipping gifts in excess of the exemption amount are taxed at an additional maximum rate of 40%.  For future years, the 2017 law provides for continuing annual inflation increases in the exemption amounts through 2025.  On January 1, 2026, in the absence of future legislation, the exemption amounts are scheduled to revert to the 2017 levels ($5.49 million + inflation adjustment).
   One concern surrounding use of the current, high exemption amounts for lifetime gifts was whether the IRS would try to “claw back” taxes on such gifts if a lower exemption amount ended up applying at the time of the donor’s death. Effective as of late November 2019, final regulations issued by the Internal Revenue Service on this matter (IR-2019-189) eliminated such concern.
   Income tax basis rules remain unchanged, with inherited property receiving a reset of basis at date-of-death value.
   North Carolina currently has no state inheritance, estate or gift tax.

Annual Exemption Gifts & Spousal Gifts

   The federal annual gift exclusion amount for 2022 has increased to $16,000 per donee (up from $15,000 in 2018-2021).  This exclusion allows an individual donor to give an unlimited number of “annual exclusion gifts,” so long as the amount of each gift does not exceed $16,000 per donee during calendar year 2022.  (Generally, married couples can give $32,000 per donee as long as certain measures are taken.)
   Annual exclusion gifts do not use up any of a person’s lifetime “unified exemption amount,” and generally no gift tax return is required.  If you make a gift in excess of $16,000 to one donee, you may still avoid paying a gift tax on the excess by filing a gift tax return (IRS Form 709), with an election to use part of your unused unified lifetime estate and gift tax exemption amount to cover the overage. 

   As in years past, a person may give an unlimited amount to his or her spouse by using the “unlimited gift tax marital deduction,” as long as the donee spouse is a U.S. citizen.  If the donee spouse is not a U.S. citizen, tax-free transfers to the non-citizen spouse are limited to a “super annual exclusion” amount, which increased to $164,000 in 2022 (up from $159,000 in 2021).  As with other gifts in excess of annual exclusion amounts, the donor spouse may still avoid tax by filing a gift tax return and electing to use his or her unused lifetime exemption amount to cover the overage.
   All annual exclusion gifts and spousal gifts must be gifts of a “present” interest as opposed to a “future” interest, and further qualifications can apply.  It is recommended that you consult your tax advisor prior to making a particular gift.
Other Tax-Free Lifetime Gifting

   Lifetime gifts to qualified charities may generally be made in unlimited amounts, free of gift tax.  In addition, certain direct payments made on behalf of others are not considered “gifts,” and may be made in unlimited amounts.  These include direct payments on behalf of another person to educational institutions for tuition and to medical providers for medical care.  These payments must be made directly to the institutions or providers, however, or they will be treated as gifts to the individuals.  Because certain qualifications apply, it is recommended that you consult your tax advisor before making particular charitable gifts or payments on behalf of others.
Review of Estate Planning Documents for Outdated Estate Tax Provisions
   In contrast to the current federal estate and gift tax exemption amount, as recently as 2008 the exemption amount was $2 million; in 2003 it was $1 million, and in 2001, it was $675,000.  This change has resulted in many outdated estate plans, and much of the tax-avoidance attention in estate planning (for estates less than the exemption amount) has shifted away from estate tax, focusing instead on income tax considerations ‒ including efforts to maximize stepped-up basis of appreciated assets and avoidance of capital gains for heirs.  It may be important to review old estate planning documents to make sure estate tax planning contained therein does not create any unnecessary income tax burden under current tax law ‒ or cause other unwanted, non-tax consequences.



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Gay Vinson is an attorney at Marshall, Roth & Gregory, PC. Her practice is concentrated in trust and estate planning and administration.
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