Two key estate planning numbers will change effective January 1, 2022: The lifetime unified gift and estate tax exemption, and the annual estate tax exclusion. These changes may impact you if you have a taxable estate.
The lifetime exemption is the total amount of money that you can give away, free of estate tax, in life and/or death. A married couple can give away twice that amount. Effective January 1, 2022, the exemption increases to $12,060,000. (The current lifetime exemption is $11,700,000.)
The annual exclusion is the amount that you may give to as many individuals as you wish within a given year, without reducing your lifetime exemption. A married couple can double that amount. The annual exclusion will increase to $16,000 effective January 1, 2022. (The current exclusion is $15,000.)
Reduce Your Taxable Estate By Making Annual Gifts
If you have a potentially taxable estate, transferring money via the annual exclusion over the years can be a good strategy to avoid or reduce estate taxes and put more tax-free money in the hands of loved ones. Here are a few examples of how this strategy works:
You are not married:
You give your three children $16,000 each in 2022, for a total gift of $48,000. You will not need to file a gift tax return and your lifetime unified gift and estate tax exemption will be unaffected.
You give your three children $20,000 each in 2022, for a total gift of $60,000. The excess of each gift over $16,000 must be totaled and reported via a federal gift tax form, and the amount you will be allowed to pass tax-free going forward will be reduced correspondingly. In this case, your lifetime exemption is reduced by $12,000 ($20,000 minus exclusion of $16,000, x 3 gifts).
You are married:
You and your spouse give your three children $16,000 each in 2022, for a total gift of $96,000. You will not need to file a gift tax return and neither of your lifetime gift and estate tax exemptions are reduced.
You and your spouse give your two sons and your daughter $20,000 each in 2022, for a total gift of $120,000. The excess of each gift over $16,000 must be totaled and reported via a federal gift tax form, and the amount each of you will be allowed to pass tax-free going forward will be reduced correspondingly. In this case, each spouse’s lifetime exemption is reduced by $12,000 ($20,000 minus exclusion of $16,000, x 3 gifts).
Pay Medical and Educational Expenses: No Limit
Another way to reduce the size of your taxable estate is by paying someone’s medical or educational expenses. The payment must be made directly to the provider. When you make such gifts, you are not limited to the $16,000 cap. For example, you could pay your grandchild’s annual $35,000 college tuition by writing a check directly to his school. You would not have to file a gift tax return, and neither your annual exclusion or your lifetime exemption would be impacted.
Portability of Lifetime Exemption Between Spouses
Surviving spouses have the right to transfer to themselves any unused portion of their deceased spouse’s estate tax exemption, thus adding to their own exemption and allowing more money to be passed to heirs tax-free. This feature of the tax code is called “portability. To take advantage of portability, the personal representative (executor) or trustee of the decedent’s estate must file a federal estate tax return (Form 706) and take the portability election.
Exemption Scheduled To Plunge in 2026, So Make Gifts Now
The estate tax exemption has been gradually increasing under the provisions of the 2017 Tax Cuts and Jobs Act. However, unless other legislation is passed, on January 1, 2026 the exemption will return to its pre-2017 level of $5.49 million per decedent, adjusted for inflation. That will bring the lifetime exemption somewhere above $6 million. It follows that if estate taxes are your concern, you would be wise to make gift-tax-free gifts as much as possible before then.
Don’t Confuse Federal Tax Rules and Medicaid Rules
If you are considering applying for Medicaid benefits for long-term nursing costs, you should understand that Medicaid rules are different from federal estate tax rules. Although you can give up to $16,000 to as many individuals as you wish annually without impacting your exemption, the gift WILL count against your Medicaid eligibility if it is made within five years of applying for benefits. Click here for more information about Florida Medicaid eligibility for nursing home benefits.
For the IRS’ full list of inflation-related adjustments for 2022, click here.