It is not too early to consider estate planning strategies that may help mitigate the tax burden in the future.
While the current exemption levels for federal estate and gift taxes are favorable for investors, these amounts were set by the Tax Cuts and Jobs Act of 2017. The exemption levels are set to expire after 2025 unless Congress takes some legislative action.
Key estate tax figures for 2022
Here are four estate planning ideas that investors may want to consider in 2022.
1. Be mindful of irrevocable trusts and taxes
The low income threshold ($13,450 for 2022) will subject income retained within an irrevocable (non-grantor) trust to the highest marginal tax rates and the 3.8% Medicare surtax. For this reason, trustees may want to reconsider investment choices inside of the trust (municipal bonds, life insurance, etc.). Trustees may also consider (if possible) distributing more income out of the trust to beneficiaries who may be in lower income tax brackets.
2. Review estate planning documents and strategies
The increase in the lifetime exclusion amount for gifts and estates ($12.06 million per individual in 2022) may have unintended consequences for some individuals and families with wealth under that threshold. They may think that they do not have to plan for their estates. However, taxes are just one facet of estate planning. It is still critical to plan for an orderly transfer of assets or for unforeseen circumstances such as incapacitation. Strategies to consider include proper beneficiary designations on retirement accounts and insurance contracts, wills, powers of attorney, health-care directives, and revocable trusts. Additionally, existing trusts should be reviewed to determine if changes are needed as a result of recent tax law changes.
3. Plan for potential state estate taxes
While much attention is focused on the federal estate tax, certain residents need to know that many states have estate or inheritance taxes. A number of states are “decoupled” from the federal estate tax system. This means the state applies different tax rates or exemption amounts. A taxpayer may have net worth comfortably below the $12,060,000 exemption amount for federal estate taxes, but may be well above the exemption amount for their particular state. It is important to consult with an attorney on specific state law and potential options to mitigate state estate or inheritance taxes.
4. Develop a strategy for low cost-basis assets
Ensure stepped-up cost basis is maintained when property is transferred at death. For example, careful consideration should be made around lifetime gifts that may jeopardize a step-up in cost basis on property at death. When property is gifted, the party receiving the gift generally assumes the original cost basis. Additionally, certain trust provisions (swapping powers) may be utilized to ensure that property receives a step-up in cost basis at death.
Discuss with an advisor
When considering making changes to estate or gift plans, it is important to discuss these ideas with a financial advisor. Individuals considering advanced strategies should work with a qualified estate planning attorney who has knowledge of their financial situation and goals.
Looking for more tax-smart ideas around estate planning, read “A closer look at current estate and gifting tax rules.” (PDF)
See the latest tax figures for 2022 in “2022 tax rates, schedules and contribution limits.” (PDF)
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Bailey Wealth Services and LPL Financial do not provide tax or legal advice.
This material was prepared by Putnam. Putnam is not affiliated with Bailey Wealth Services or LPL Financial.