At the end of 2021, the Internal Revenue Service (IRS) issued Rev. Proc. 2021-45 which provides inflation adjustments for sixty-two sections of the Internal Revenue Code (I.R.C.), including gifting rules. Most notably, the basic exclusion amount for decedents who die in 2022 was increased from $11.7 million to $12.06 million, and the annual exclusion for gifts was increased from $15,000 to $16,000 (last increased in 2018). The “super” annual exclusion of $157,000 for gifts to non-citizen spouses is $164,000 for 2022.
These inflation adjusted amounts may not apply, however, if the estate and gift tax laws are significantly altered by legislation. Major legislation is being discussed currently. If your estate is valued around $6 million, you may want to contact us to explore more proactive tax mitigation strategies.
What are my options?
Some estate planning tools available to mitigate estate taxes include Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), Irrevocable Life Insurance Trusts (ILITs), and Charitable Trusts.
Grantor Retained Annuity Trusts (GRATs) can be a powerful planning tool for an asset expected to appreciate significantly in value. When you place highly appreciated assets into a GRAT, you give up control over the asset, but you can receive regular annuity payments during your lifetime. The balance of the trust would then be passed on to your heirs free of any gift or estate tax.
Spousal Lifetime Access Trusts (SLATs) are a type of irrevocable trust where one spouse makes a gift into a trust for the benefit of their spouse, while moving assets away from their combined estate. This may offer couples a way to take advantage of the high federal lifetime estate tax exemption (now $12.06 million per spouse) before it is set to expire in 2025, or before new tax laws are enacted.
Irrevocable Life Insurance Trusts (ILITs) are created to own a life insurance policy. You designate the trust as the owner and the beneficiary of your life insurance policy so that, when you pass away, the policy proceeds are distributed to the trust. The main advantage of an ILIT is that it removes your life insurance death benefit from your taxable estate and leaves a protected inheritance for your spouse and/or other heirs. These funds can then be used to help pay estate costs and provide your heirs a guaranteed tax-free inheritance. Charitable trusts can also be explored to provide tax advantages during your lifetime or at the time of your passing. If you think any of these planning tools could be helpful to you or your family, please contact Penny or Elizabeth.