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Just recently, IRS has announced the new inflation-adjusted numbers for 2022 with estate and gift tax exemption climbing up to higher figures which means that affluent taxpayers can gift more to their heirs tax free during life or at death.

Estate and gift taxes are a linked set of federal taxes that apply to wealth transfer.  The federal estate- and gift-tax exemptions apply to the sum of an individual’s taxable gifts given during life and assets left at death. These exemptions can potentially result to a significant reduction of your tax exposure. However, the exemptions constantly change as new laws and regulations are being passed.

So, with the flurry of news and updates about the changes on the estate and gift tax laws, concerned individuals and their tax advisors need to reassess their estate planning tools. And there’s no better time than now to review and implement estate planning strategies with Credo CFOs and CPAs team that would help you save yourself and your family millions of dollars of taxes.

Have a better understanding of the basics of estate and gift taxes, how estate tax works and its interaction with gift tax, and the importance of doing a valuation of your gift and estate strategy by reading this blog post.

2022 Estate and Gift Tax Exemptions

[1] Rev. Proc. 2021-45 outlines the key figures for 2022 with the following adjustments on estate and gift tax laws:

Effective January 1, 2022…

  • Gift tax exemption will climb to $16,000 (from the current law of $15,000) per year. This yearly exemption is the combined amount of present interest gifts that be given to any person outside of the lifetime gift tax exemption.
  • Federal lifetime gift tax (estate tax) will go up to $12.6 million (from the current law of $11.7 million) per individual and $24.12 million for a married couple (from the current law of $23.4 million).
  • As the gift and estate tax are merged, the same rules apply as the estate tax exemptions for people who die in 2022.
  • Annual amount of gifts to a non-citizen is set at $164,000 (not including the gifts of future interests in property)
  • Adjustment of GST exemption to $12.6 million.

Expected Changes at the Start of 2026

The $12 million estate tax exemption is expected to be reduced to $6 million at the start of 2026. According to the early version of the [2]Build Back Better Act (BBBA), the reconciliation bill that is currently in Congress would speed up the sunset to 2022 with about $6 million exemption (but it was amended on October 29, 2021 allowing the present law to sunset in 2025). The new tax laws on estate planning are delineated in the [3]“Green Book” or the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals as released by the U.S. Department of the Treasury on May 28, 2021. Though the items outlined in the Green Book are not determinative, here’s a gist of the changes that are expected to happen and the significant impact on estate planning if the proposals are enacted:

Reduced Amount for Transfer Tax Exemptions and Increased Transfer Tax Rates

On January 1, 2026, it is expected that there would be changes on the estate and gift tax laws. As can be remembered, during the campaign trail of then-candidate Biden, he expressed the desire to cut the gift and estate tax exemptions from the current $11.7 million (or $23.4 million for a married couple) to $3.5 million (or $7 million for a married couple) and raise the gift and estate tax rate from 40% to 45%. It is also revealed by Treasury that the present administration would likely have a considerable increase in the types of transfer that would set off capital gains for income tax purposes (possibly at the recommended higher capital gains rates).

This concerns a lot of people as the lifetime estate and gift tax exemption might decrease to as low as $1 million. This means that if you have a fairly large estate, donating assets to your children or into a trust this year still permits you to take advantage of the exemption while it is still at $11.7 or $23 million (and a higher exemption amount next year). Gifts given under the present law would be grandfathered in even with the reduction of the exemption amount.

The ultra-high-net-worth clients and the high-net-worth clients need to act on the changes. A number of these clients who either failed to execute gift planning in 2020 / 2021 or were not able to completely make use of their available gift and estate tax exemptions can still do so now and for the next few years.

To Illustrate the Problem…

Assuming a couple who have a combined net worth of $30 million will not act on the said changes and live past 2025 who possibly will have a taxable estate of $18 million), at a tax rate of 40%, would have a total of $7.2 million tax bill. Had they gifted an amount of like $23.4 million (which is still covered under the current tax exemption), the taxable estate would only be $6.6 million which would result to a tax bill of around $2.5 million. See how they could save about $5 million in taxes? The same computation would be yielded regardless if the couple would die on the year when there is lower exemption that on the year of their gifts.

Revoking of Numerous Effective Estate Planning Methods: 

Here are some of the present tax proposals that could cancel or limit a number of useful planning techniques:

  • Abolishing the “Use of Short-Term [4]GRATS” – The proposal to increase the minimum term of two years to ten (10) years and requiring a gift value of at least 25% of the total value would abolish the “zeroed-out” GRAT method and could possibly eradicate the usefulness of the GRAT given the mortality risk related to the longer-term GRATs.
  • Restricting the Use of Dynasty Trusts – Dynasty trusts let trust assets to be passed on from generation to generation without the burden of transfer tax. Removing [5] GST tax exempt status for trusts with a duration of more than 90 years would significantly lessen the value of long-term dynasty trusts.
  • Limiting of Valuation Discounts for Family Partnerships / LLCs – The possibility of having a distinction between active and passive assets could be made if non-business and passive assets like marketable securities are treated as owned by the owners of the business and appraising them without any discounts.

Changes in Income Tax and Retracting of Step-Up in Basis of Death

The current proposal to raise the top federal income tax rate (from 37% to 39.6% for individuals who earn beyond $400,000 a year) and the proposal to increase the tax on capital gains and qualified dividends (from 20% to 39.6% for those who earn beyond $1 million a year) would definitely impact the estate planning strategies of the high-net worth taxpayers.

Also, the proposal to cancel the long-standing step-up in basis for the capital gains tax in which a beneficiary is not required to pay capital gains tax on any pre-death appreciation on the value of the assets would subject highly appreciated assets inherited by a beneficiary to a much higher income taxes once the asset is eventually sold.

Now is the Perfect Time to Plan!

The changes proposed are dynamic and have impacts to estate planning strategies.  The opportunity is to take advantage now in advance of a change in the law.

You might want to consider the following planning opportunities:

  • Use It Now (while you still have time) or Lose It Forever – Fundamentally, an estate/gift tax exemption is a “use it or lose it” scheme. IRS already publicized that should affected taxpayers failed to take advantage of the present high gift exemption before the changes, the benefit will be gone forever. Anyone who utilizes the higher exemption amounts before the law sunsets in 2025 won’t be penalized even if they would die after the decreased amount is implemented.
  • Give partial interest in the property (i.e. interest in real estate of an LLC) as it may be helpful since the value (for gift tax purposes) can be reduced by specific discounts like a discount for lack of marketability and / or lack of control.
  • Make use of “disclaimer planning” for gifts into trusts if you are worried that major changes will not be ratified in the short-term to give you an opportunity to amend the plan without fearing the adverse tax consequences. Just make sure that you are executing the disclaimers cautiously and be in compliance with the state law and federal tax laws.
  • Make use of the [6] Spousal Lifetime Access Trusts (SLATs) to allow your spouse continued access to trust income and / or principal (with some restrictions). The SLATs is a smart strategy for the ultra-high-net-worth and high-net-worth individuals who want to make use of the increased exemption amounts but are not comfortable handing over access to the gifted assets (if ever it is needed in the future).
  • Consider charitable planning strategies for the charitably-inclined.
  • Consider applying a GRAT now prior to the enactment of the tax law changes. This method is applicable to all types of clients regardless if they have maximized or not their tax exemptions.

We have listed here more estate and gift planning opportunities that you may want to consider to ensure a well thought out and properly implemented gift and estate plans.

Why You Need a Valuation Expert

As Congress is yet to scrutinize the mentioned techniques, those who are likely to be affected by the changes in the estate and gift tax laws need to act despite the winding up of the Build Back Better Act.

The estate and gift tax filing is multifaceted and requires the proficiency of legal and tax professionals who have broad training and experience in this area. Working with qualified estate planning and valuation experts like our team at Credo CFOs & CPAs would help you understand the complexities of the ever-changing federal and state tax laws. Our team’s experience and expertise in valuation and in handling estate and tax planning concerns would equip you on how to best leverage those policies and curtail your potential estate and gift tax liabilities.



[1] Rev. Proc. 2021-45: https://www.irs.gov/pub/irs-drop/rp-21-45.pdf

 [2]Build Back Better Act (BBBA): https://www.whitehouse.gov/build-back-better/

[3]“Green Book” or the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals: https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf

[4]“Use of Short-Term GRATS”: A grantor-retained annuity trust (commonly referred to by the acronym GRAT), is a financial instrument commonly used in the United States to make large financial gifts to family members without paying a U.S. gift tax. (Source: https://en.wikipedia.org/wiki/Grantor_retained_annuity_trust)

[5] GST tax exempt: The GST tax compels an additional transfer tax (at a 40% tax rate in addition to the 40 percent estate tax rate) on transfers made during lifetime or at death to persons more than one generation below the donor. Long-term GST tax exempt trusts, frequently referred to as “dynasty” trusts, allow for trust assets to pass from generation to generation without the burden of transfer tax.

[6] Spousal Lifetime Access Trusts (“SLATs”): A SLAT is a gift from one spouse to an irrevocable trust from which the other spouse may profit from in the future. The gift to the SLAT will use the donor’s exemption and the post-transfer appreciation on the trust’s assets that is not given to the spouse will not be subject to future gift, estate, and possibly GST tax.