Q: With the 2022 Midterm Election results still being finalized, I have seen various articles and commentary on whether people need to make gifts or engage in estate tax planning before the end of the year. How do I know whether this is something that affects me?
A: There has been commentary this year about whether (depending on the results of the Midterm Elections) there would be any action in Congress to lower the applicable exclusion amount before 2025. As a reminder, Federal law provides that an individual can transfer assets free of estate and gift tax as long as the transfers are under a certain amount. In 2022, this amount is $12,060,000 per person. The applicable exclusion amount is indexed annually for inflation, and the IRS has confirmed that in 2023 the amount will be $12,920,000 per person. Additionally, the rules allow for “portability”, which means a married couple can combine their individual applicable exclusion amounts. Only assets in excess of the applicable exclusion amount in effect at the time a person passes away are subject to the Federal estate tax, which is currently set at 40%.
However, the current applicable exclusion amount will sunset in 2025 and automatically reduce to $5,000,000 per person, indexed for inflation. There was legislation introduced last September that would have accelerated the sunset so that the exclusion amount would have been reduced as of January 1, 2022. The legislation (as introduced) did not pass, but it has caused people to monitor whether similar legislation might be introduced again. While the results of the Midterm Election are still being finalized, it does not appear that these tax issues will be a priority for Congress this year.
If you are concerned that you may have a taxable estate under the post-2025 lower exclusion amount, you might consider making gifts sooner rather than later. Notably, the IRS has issued anti-claw back regulations stating that gifts made while the current exclusion amount is in effect will still be honored and not “clawed-back” into the estate if a person passes away when the amount is lower. There are many gifting strategies that can be employed to maximize flexibility and yet make a completed gift and use your applicable exclusion amount. This analysis is specific to each person and family and should be undertaken with your estate planning goals and core capital needs in mind.
(Please note, this answer is only addressing the Federal estate and gift tax laws. New Hampshire does not have a state estate or gift tax, but other New England states do. Massachusetts, for example, imposes a state estate tax on estates over $1 million.)