Rumors of Expiry Greatly Exaggerated – Estate Tax Exemptions Remain High in 2022

Rumors of Expiry Greatly Exaggerated – Estate Tax Exemptions Remain High in 2022

Our headline refers to a well-known quote from Samuel Clemens – Mark Twain to his readers – a common occurrence in American culture.

“The reports of my death are greatly exaggerated,” comes from a letter Sam wrote to a journalist, who’d written that Twain’s health was failing, and he was fix’n to expire. Mind you, most of this is a myth, but popular history is often better that way.

I won’t call it fake news – there’s truth in there somewhere – but often in life, we report things as fact when we really don’t know. Take the case of Joe Biden’s plans to reform our nation’s transfer tax system, which covers the way we pass money and other valuable assets on to our heirs.

The matter is complex, but boils down quite neatly: under the Tax Cuts and Jobs Act of 2017, eagerly sponsored and signed by President Donald Trump, the lifetime estate tax exemption was raised to $11.2 million per individual, double that for married couples. Estates exceeding that amount paid a 40% tax at time of death.

This was a healthy exemption, when compared to the $5.6 million limit in force at the law’s passage. There was predictable squawking from left-leaning opponents about favoritism – solely the rich would benefit, they said.

Whether or not that was true – certain government figures suggest the overall reform package mainly benefited the middle class – no matter, because when the issue came up in the presidential election, a plurality of voters bought the notion. And so Joe Biden became president, promised to amend estate tax laws, great and small.

It seemed he could do it. Yet one after another, the Democratic reform-the-reform proposals fell. As of today, they are all gone.

To illustrate what happened, let’s examine a seemingly tangential, yet in fact intimately entwined issue, the step-up in basis rule. Unjust, unfair, un-American, said the Democrats, easy pickings for a quick-and-early victory. Yet with hardly a fuss, it bit the dust.
Congress tried to kill the step-up in 1979. It was impossible, a bookkeeping nightmare, and the law was repealed after one ineffectual year. I suppose some crusty old staffer pulled a dusty old chronicle from the Congressional vault, pointed to the relevant text, crossed out in red, and everyone relented.

Reform ain’t so easy, yet it can sometimes be done with surprisingly little effort – even no work at all. Plans to reduce the estate tax exemption back to pre-TCJA levels came and went, too. Yet if we wait just a bit, the reformers can claim victory without breaking a sweat. It’s all contained in the law itself.

It’s called the sunset: the TCJA contains a provision that returns the exemption to the pre-Trump reform limit at midnight, December 31, 2025. That’s not so far off, in grand political terms. Meanwhile, wealthier citizens with rich estates to protect have received a reprieve.

They should make hay while the sun shines. Let’s run through the meadows of opportunity, as gather them rosebuds while we may. Who originally wrote those words, now? Must have been Clemens.

The exclusions set in TCJA are indexed to inflation, capping a fine cherry on the foul sponge cake of inflation we’re experiencing today. The indexed increases that account for inflation in 2022 take the federal estate tax exemption to $12,060,000 per individual, doubled for married couples. The 40% top estate tax rate still applies if that limit is breached.

The exemption for lifetime gift-giving and the generation-skipping tax is the same at $12,060,000. I like typing out that number, it helps me to dream.

FYI, if anyone feels kindly toward me, the annual gift tax exclusion is now raised to $16,000, most generously doubled for married couples, somehow. This amount reflects a $1,000 top-up on last year’s exclusion, indicating just how high inflation has summited. Hey-ho, silver lining, as we used to say in the ‘70s, though I can’t recall just why.

A solid gifting strategy is being suggested today: instead of handing a loved one some cash, instead gift them securities that lost value during the pandemic – most portfolios are swollen with such shrunken skeletons. Stocks that go down, eventually go up, as one may have heard, so you’ll be bestowing a double blessing on loved ones, with the IRS’s blessing, I am told. What did I just say about shining linings?

For the fearful among you, recall that the Treasury Department and the IRS have both promised no ‘clawback’ on the estates of parties who die in 2026 or beyond – after the exclusion falls back to $5 million or so – who availed themselves of the elevated exclusions of 2018-25, the active years of TCJA. We’ll just have to take them at their word.

Bottom line, this year’s heightened exemptions present a great opportunity to share more of your assets with heirs, now or post-life. We cannot predict what future political shocks may unhorse us, but for 2022, the field seems clear. Estate planning teams of my acquaintance are champing at the bit to explain myriad tax-advantageous ways of accomplishing your goals. We dodged a bullet this year, pardners – it’s time to mount up and ride.

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