Legislative Updates for Property Planning Legislation in 2021 and 2022

Legislative Updates for Estate Planning Law in 2021 and 2022

2021 was an fascinating yr for property planning. Whereas switch tax exemptions remained at traditionally excessive ranges, legislative proposals threatened to place an finish to widespread property tax planning strategies. Though uncertainty round future laws continues, there are a selection of methods that taxpayers can use to make the most of present exemption ranges and strategies.

Present Switch Tax Legal guidelines

The federal reward, property, and generation-skipping switch (GST) tax exemptions (that’s, the quantity a person can switch freed from any of those taxes) are $11.7 million per particular person for 2021, rising to $12.06 million in 2022. Thus, starting in 2022, a married couple can theoretically switch as much as $24.12 million freed from federal switch tax — an unprecedented quantity. The switch tax exemption shall be adjusted upward for inflation in future years, however below present legislation it’s scheduled to be lowered by 50 p.c on January 1, 2026. A marital deduction is allowed for property passing straight or in qualifying trusts for the good thing about a surviving partner. The federal property tax charge for transfers above the switch tax exemption that don’t qualify for the marital or every other deduction is a flat 40 p.c. The federal switch tax exemptions can be utilized both throughout lifetime or at loss of life. Utilizing exemption throughout lifetime is mostly extra environment friendly for switch tax functions, as any appreciation on the gifted property escapes property taxation.

The Treasury Division has confirmed that the extra switch tax exemption granted below present legislation till 2026 is a use it or lose it profit, and that if a taxpayer makes use of the “further” exemption earlier than it expires (by making lifetime presents), it won’t be “clawed again” to trigger further tax if the taxpayer dies after the exemption is lowered in 2026. Virtually, because of this a taxpayer who has made $6.03 million or much less (adjusted for inflation) of lifetime presents earlier than 2026 won’t lock in any good thing about the additional exemption, whereas a taxpayer who makes use of the extra exemption earlier than 2026 (by making presents of $12.06 million earlier than 2026) will lock in the good thing about the additional exemption.

The Illinois property tax exemption is $4 million per particular person. This exemption doesn’t obtain annual inflationary will increase. As with the federal property tax, a marital deduction is allowed for property passing straight or in qualifying trusts for the good thing about a surviving partner for Illinois property tax functions. The efficient marginal tax charge for transfers above the Illinois property tax exemption that don’t qualify for the marital or every other deduction ranges from 8 p.c to roughly 29 p.c.

As with earnings taxes, state property taxes are deductible for federal property tax functions. The cumulative federal and Illinois property tax charge (for estates above each the federal and Illinois exemptions), taking deductions under consideration, is roughly 48 p.c.

Federal tax legal guidelines permit for an annual exclusion quantity that may be gifted from anybody particular person to every other particular person in any given yr with out utilizing up any property/reward tax exemption. This quantity, set at $15,000 per donee for 2021, will enhance for inflation to $16,000 per donee in 2022.

Legislative Proposals

President Biden’s marketing campaign included a proposal to cut back the federal switch tax exemption to $3.5 million. Nevertheless, Democrats struggled with potential tax laws in 2021 given their skinny margin of management of the Home of Representatives and particularly the Senate. In September, the Home Methods and Means Committee launched an intensive tax package deal that will have resulted in huge adjustments for property tax planning. The package deal proposed lowering the present $11.7 million property/reward tax exemption by 50 p.c on January 1, 2022, eliminating using valuation reductions for non-operating companies, and curbing using deliberately faulty grantor trusts, or IDGTs (a sort of irrevocable belief generally utilized in property tax planning as a result of substantial advantages it will probably obtain, additional mentioned beneath). This proposal set off a frenzy of lifetime gifting. Nevertheless, in October, a brand new model of the Construct Again Higher Act was launched that dropped the property tax provisions from the unique proposal.

The contours of future laws stay unsure. It’s doable that some model of the Construct Again Higher Act may cross with none adjustments to switch tax legal guidelines. Nevertheless, the September proposals could point out an elevated consciousness on the a part of congressional Democrats of the IDGT technique and a want to curtail it.

Lifetime Switch Methods

Even with these provisions dropped from the present proposal, taxpayers ought to proceed to strongly think about lifetime gifting methods, for a number of causes. First, the property/reward tax exemption remains to be scheduled to be lowered by 50 p.c on January 2026, even when Congress does nothing. Taxpayers who haven’t used the “further” exemption earlier than then will lose it endlessly. Second, any post-appreciation switch on gifted property accrues outdoors of the taxpayer’s property. That is particularly salient for youthful people and for transferred property with excessive potential for appreciation. Third, for taxpayers who reside in states with a state property tax however no state reward tax (equivalent to Illinois), lifetime gifting could have the impact of lowering state property tax legal responsibility. Lastly, for people who’ve already used all of their property/reward tax exemption, the present low rate of interest surroundings makes sure superior property tax planning strategies extra prone to succeed. Extra info on a few of these strategies is accessible right here.

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