Estate Planning in 2022: Big Changes Ahead & What You Can Do About ThemNovember 22, 2021
Whether you have an established estate plan or are in the process of assembling one, big changes are ahead – and those changes are a mixed bag. On the one hand, the estate tax exemption has been bumped up to $12.06 million for 2022. On the other, the estate tax exemption will be drastically lowered to $5.49 million (before adjusting for inflation) by 2026, if not sooner.
But fear not! Yes, there are many sticky details to consider, but every challenge is also an opportunity. Consider this your opportunity to reflect on your estate plan so that you can effectively plan the future of your assets.
Why you need an estate plan
If you have assets – a home, a retirement plan, ownership in a business – and you want the future of your assets to be distributed in a way that aligns with your values, then you need an estate plan.
An estate plan is a collection of documents that safeguards your assets by outlining how you want them to be passed down. Your assets and property include:
- Tangible assets, like homes, cars, and collectibles
- Intangible assets, like bank accounts, stocks and bonds, and life insurance policies
Think of an estate plan as a roadmap that will guide the process of passing along your wealth after you pass away. This roadmap includes:
- A will, which outlines who will receive your assets, who will care for your children (if you have any), and who will act as the executor (the person who carries out the estate plan)
- A power of attorney, who will act in your place and oversee major financial and medical decisions if you are unable to do so
- A living will, which describes your end-of-life wishes
- A trust, which can provide large tax deductions and allow you to specify how your assets will be distributed
An estate plan allows us to be intentional about our legacy. Without an estate plan, your state’s laws will determine what happens to your assets. With an estate plan, you can be sure that your assets and property will be distributed according to your wishes.
The major tax changes coming to estate planning
One of the most tax-efficient ways to pass on wealth to your loved ones is to leverage the lifetime gift and estate tax exemption.
The good news about this exemption? In 2022, this exemption will increase from $11.7 million to $12.06 million, meaning you can gift up to $12.06 million tax-free over the course of your lifetime.
The news that’s causing many to step on the gas? This exemption increase is only temporary, and significant decreases are on the horizon. Beginning in 2026, the lifetime estate and gift tax exemption will be lowered to $5.49 million (before adjusting for inflation).
That means many need to evaluate their estate plans now. Not only are exemption decreases on the way, but Congress has been considering speeding up the decrease deadline to 2023. While it doesn’t look like this change will make its way into this year’s legislation, it’s a good idea to examine and recalibrate your plan sooner rather than later to maximize the benefits of the current exemption rules.
How and when to act
For those with estates above $5.49 million in value, now is an especially critical time to consider your giving strategy. There is a significant difference between the 2022 and 2026 exemption values ($12.06 million in 2022 and approximately $6.4 million in 2026, when adjusted for inflation*).
This difference will likely inspire many to make substantial gifts before 2026. If you have the means to make a significant gift of up to $12.06 million before 2026, the gift is not just tax-exempt – it also has greater opportunity to increase in value for the recipient. For example, if you gifted $12.06 million to your children in 2022, that money could grow over time when saved and invested wisely. Conversely, if you were to make a gift after 2025, the gift will have risen in value while under your supervision, but it would also be taxed up to 40% upon gifting.
But making a gift decision is not all just objective calculations. Deciding to give a gift early requires balancing subjective variables too. Ask yourself questions like: Am I ready to part with such a substantial sum? Will this gift be an excellent opportunity for the gift recipient to develop financial acumen, or is the recipient not yet ready to receive such a substantial gift?
Having a trusted wealth advisor will help you ask nuanced questions and make a decision that’s right for you.
Let’s recalibrate your estate plan – together.
The rules may be ever-evolving, but that’s why we’re here. We’re here to help you navigate the complex tax landscape so that you and your loved ones have a plan that allows your legacy to thrive for generations to come.
*$5.49 million is the 2017 value for the lifetime exemption. When it comes into force in 2026, the value will likely be around $6.4 million due to adjustment for inflation. Estimate by PNC.