2022 Year-End Tax Planning Guide for Individuals & Families
Article

2022 Year-End Tax Planning Guide for Individuals & Families

by Kelly Gillette
November 08, 2022

Updated December 01, 2022

Key Tax Considerations From Recent Tax Legislation

There have been significant changes to many tax provisions in 2022. The American Rescue Plan Act implemented many new provisions to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption in 2021. Some of these provisions expired in 2022 and others have been extended. Additionally, to address recent inflation in the markets, new measures have been taken that impact high-net-worth individuals, changing their tax exposure for this year’s filings and affecting their planning strategies for 2023.

Table of Contents

Timing Is Everything – Deferral or Acceleration?

Historically, the general advice has been to defer income and accelerate deductions. This recommendation is more nuanced now and depends largely on timing. It also should be based on individual circumstances and will vary from taxpayer to taxpayer. Your tax situation may benefit more from a deferral versus an acceleration, or vice versa. An in-depth review with your tax professional will help you determine the right actions before the year’s end.

If deferral is the right plan for you, consider any opportunities you have to move income to 2023. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents and payments for services or completing that sale transaction. Doing so may allow you to postpone paying tax on the income until next year. If there's a chance that you'll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income, as well.

Similarly, it might be the right move to consider ways to accelerate deductions into 2022. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest or state and local taxes by making payments before the end of the year. You might also consider making next year's charitable contributions this year instead.

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2022 and postponing deductible expenses to 2023. That might be the case, for example, if you can project that you'll be in a higher tax bracket in 2023. The decision to pay taxes this year instead of next should be weighed with the consideration that the income could be taxed at a higher rate or push you into a higher bracket next year.

With possible adjusted gross income (AGI)-based phaseouts of deductions and credits or surcharges on income, spreading income over the next few years may result in the best overall tax planning for your situation. If that’s the case, a careful review of both income and deductions projected forward could be the best option to minimize tax liability overall.

Factor in the Alternative Minimum Tax

Although the alternative minimum tax (AMT) doesn’t affect as many taxpayers as it used to, it is an important consideration for 2022 tax filings if you're subject to it, since traditional year-end actions, like deferring income and accelerating deductions, can have a negative effect. That's because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows several itemized deductions and adds back certain non-taxable items. This is a complex calculation where income is recalculated based on AMT rules, and the higher of regular tax or tentative minimum tax is paid.

The AMT exists to be sure everyone pays a “minimum” level of tax despite using various exclusions, deductions and credits to reduce their regular tax.

Many of the add-backs in calculating AMT (e.g., state tax and miscellaneous itemized deductions) are limited or no longer deducted for regular tax purposes. Other adjustments do exist, such as for the exercise of incentive stock options (ISOs) and tax-exempt interest earned on certain private-activity municipal bonds. Note that adjustments could also come from Schedule K-1s received.

There is a significant planning opportunity with AMT add-back when exercising ISOs. When your regular tax is higher than the AMT, you may want to exercise enough ISOs to increase AMT to bring it close to the regular tax (optimum point). This will allow you to exercise ISOs without paying any additional tax dollars. Also, if you have already exercised ISOs that resulted in a significant AMT, you may want to consider selling some ISOs that are exercised within the year (disqualifying disposition) to increase regular tax to the optimum point, so you have the cash to pay for the taxes. Further planning may be available where prior year ISO exercises occurred.

For the tax year 2022, the AMT exemption amount increased to $118,100 for married filing jointly taxpayers and to $75,900 for single individuals. The exemption phases out if AGI exceeds $1,079,800 for married filing jointly taxpayers or $539,900 for single taxpayers. The exemption is indexed for inflation. Items that trigger the AMT are sometimes controllable, so careful planning is a must if you're subject to this tax.

Special Concerns for High-Income Individuals

Currently, the proposed increase in the top marginal rate to 39.6% is not in play in legislation. The top marginal tax rate (37%) applies if your taxable income exceeds $539,900 in 2022 for single tax filers ($647,850 if married filing jointly, $323,925 if married filing separately). Your long-term capital gains and qualifying dividends could be taxed at a 20% rate if your taxable income exceeds $459,750 in 2022 for single tax filers ($517,200 if married filing jointly, $258,600 if married filing separately or $488,500 if the head of household).

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 as a single tax filer ($250,000 if married filing jointly or $125,000 if married filing separately).

High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 for single tax filers ($250,000 if married filing jointly or $125,000 if married filing separately).

IRAs and Retirement Plans

Take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2022 taxable income. Contributions to a Roth IRA or a Roth 401(k) aren't deductible or made with pre-tax dollars, so there's no tax benefit for 2022, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing. (Note that married taxpayers filing a joint return with an annual income exceeding $214,000 and single taxpayers with an annual income exceeding $144,000 cannot contribute to a Roth IRA.)

For 2022, you can contribute up to $20,500 to a 401(k) plan ($27,000 if you're age 50 or older) and up to $6,000 to a traditional IRA or Roth IRA ($7,000 if you're age 50 or older). The window to make 2022 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline to make 2022 IRA contributions.

Roth Conversions

Year-end is an appropriate time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions).

If a Roth conversion does make sense, you'll want to give some thought to the timing of the conversion. For example, if you believe that you'll be in a better tax situation this year than next (e.g., you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. Whether a Roth conversion is right for you depends on many factors, including your current and projected future income tax rates.

If you have net operating losses available, they could offset most or all of the tax liability of a Roth conversion.

Required Minimum Distributions

Required minimum distributions (RMDs) are the minimum amount you must annually withdraw from your retirement accounts [e.g., 401(k) or IRA] if you meet certain criteria. For 2022, you must take a distribution if you are age 72 by the end of the year. Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs. If you also make charitable contributions, see the contribution discussion for another planning opportunity.

There is also a recent proposed change in legislation for RMDs for inherited IRAs. If you haven’t started taking your RMD, you need to act prior to year-end.

Business Travel and Meals

This year saw a comeback in people returning to the office and an increase in business travel. In the first half of the year, mileage reimbursement rates increased to 58.5 cents per mile for business travel. In the second half of the year, as a response to rising inflation, this reimbursement rate increased to 62.5 cents per mile.

If your business travel increased this year, these reimbursements could offer a way to minimize your tax liability for 2022 that may have been overlooked as it was not a priority in 2021.

For business meals, there is a 100% deduction (rather than the prior 50%) for expenses paid for food or beverages provided by a restaurant. This provision is effective for expenses incurred after December 31, 2020, and it expires at the end of 2022.

Virtual currency transactions are becoming more common and, therefore, are being scrutinized more by the IRS

Virtual Currency/Cryptocurrency

The IRS calls it “virtual currency,” but if you hold these assets or are considering them, you likely know them as crypto and digital assets.

Crypto is known for its market swings but continues to be a more common allocation for high-net-worth investors. Form 1040 has a question regarding virtual currency, which is just the first step in the IRS’s increased scrutiny of these transactions. There are many different types of virtual currencies, such as bitcoin, ether and non-fungible tokens (NFTs). The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally has tax impacts and should be considered in tax planning.

In 2021 and 2022, there was a meaningful increase in high-net-worth filers with crypto holdings and taxable transactions. The largest areas of movement in this space are:

Stablecoins – Tokenized dollars are an attractive way for investors to hold, move and earn a yield on dollar holdings. However, they aren’t free from capital gains or income tax treatment. In fact, some of the most complicated crypto tax matters arise from investors deploying stablecoins and other cryptocurrencies to decentralized finance (DeFi) protocols for lending or borrowing.

DeFi – Prevalence, and attractiveness of returns, has driven more users into DeFi. IRS guidance is far from clear on DeFi and the tax treatment methods and approaches to compliance vary widely. However, DeFi transactions often involve a capital gain and an income component, and proper tracking of cost basis is paramount to ensuring risk-reduced tax compliance filings.

Pre-sales, simple agreements for future tokens (SAFTs) and tokenized equity – The power of blockchains and tokenization has created a wellspring of new investment opportunities. Some investors have taken advantage of token pre-sales, which provide access to tokens from a crypto startup before general retail listing or availability. Similarly, some investors are entering the market through SAFTs. However, it’s important to note for planning purposes that capturing a long-term gain benefit may require first receiving the token allocation and then waiting for the long-term period to expire before disposition. Lastly, tokenized equity and securities investments are also on the rise. Again, while these gains may be attractive, they can also create tax pitfalls without proper recording and management of these transactions.

NFTs – Whether you think it’s a short-lived craze or a revolutionary way to disrupt the ownership of artwork and music, NFTs are increasingly part of the mainstream. Investors are holding “blue chip” NFTs or even less valuable NFTs simply to show their interest in a given artist, musician, company or organization. Here again, the IRS has no specific guidance for individuals engaging in NFT transactions. However, a reasonable extension of current guidance means that these assets are subject to both capital gains and income tax, depending on how the individual transacts.

1099 filings – Taxpayers should know that many of the retail platforms where they buy and hold crypto are starting to produce 1099 forms. These 1099s go to the IRS directly and to the taxpayer via their exchange, custodian or marketplace provider. Look out for 1099s in your mailbox soon as risk-reduced compliance will require the filer’s 1040 and other tax forms to match the information the IRS has on file.

Other Tax Items to Note

  • Personal exemptions are still eliminated.
  • Standard deductions have been increased to $12,950 in 2022 for single tax filers ($25,900 if married filing jointly, $19,400 if the head of household).
  • The overall limitation on itemized deductions based on the amount of AGI is not applicable.
  • The AGI threshold for deducting unreimbursed medical expenses is 10% in 2022.
  • The deduction for state and local taxes is limited to $10,000 ($5,000 if married filing separately).
  • Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married filing separately) of qualifying mortgage debt. For mortgage debt incurred before December 16, 2017, the prior $1,000,000 ($500,000 for married filing separately) limit will continue to apply. A deduction is no longer allowed for interest on home equity indebtedness. Home equity used to substantially improve your home is not treated as home equity indebtedness and can still qualify for the interest deduction.
  • The deduction for personal casualty and theft losses was eliminated, except for casualty losses attributable to a federally declared disaster.
  • Previously deductible miscellaneous expenses subject to the 2% floor, including investment expenses and unreimbursed employee business expenses, are not deductible. Some states still allow these deductions, so see your tax advisor for state tax planning benefits.
  • Purchases of property and equipment – With tax-favorable options available to businesses, many purchases can be completely written off in the year they are placed in service. Plus, there are tax-favorable rules that permit qualified improvement property to be eligible for 15-year depreciation and, therefore, also be eligible for 100% first-year bonus depreciation. Beginning in 2023, first-year bonus depreciation will be 80%. So, to receive the full 100% bonus depreciation in the first year, equipment needs to be purchased by the end of 2022.
  • Net operating losses – Beginning in 2021, all business net operating losses, other than farming losses, are only eligible to be carried forward, not back.

Tax Planning Action Items

These are some top items to consider.

  • Due to decreased values in the stock market, there are more opportunities for loss harvesting. If you recognized capital gains in 2022, you may want to harvest capital losses to offset those capital gains.
  • Let your tax advisor know about any major changes in your life such as a marriage or divorce, births or deaths in the family, job or employment changes, starting a business and significant expenditures (real estate purchases, college tuition payments, etc.).
  • Consider Sec. 529 plans to help save for education; there can be income tax benefits to do so.
  • Discuss the tax consequences of converting traditional IRAs to Roth IRAs with your tax advisor.

Review major life changes and significant expenditures with your tax advisor.


Gifting

Charitable Giving

Each family has many reasons for making charitable gifts, including making a difference in a community or to individuals, creating a family legacy and reducing income tax liability. The intention that comes up most frequently at year-end is tax liability reduction and determining the most efficient assets or vehicles to use to make a charitable gift.

As we near the end of the year and your 2022 income and deductions start to become more solidified, layering an intentional year-end gift can generate an impactful reduction in your tax liability. For those who itemize, gifts to charity offset your income taxed at the highest tax bracket first, which in 2022 is as high as 37% (or 28% if you are subject to the AMT). For those who may not itemize each year, "bunching" two years of contributions into one tax year may increase the tax impact of this tax deduction, which is discussed later in this section.

Gifting to Public Charities
For the 2022 tax year, you are able to deduct cash contributions to a public charity (e.g., American Red Cross, your favorite art museum or religious organization) up to 60% of your AGI and the value of appreciated property (e.g., publicly traded securities or artwork) held for more than a year and a day of 30% of your AGI. The AGI limit for cash contributions was 100% until December 31, 2021, when it was returned to the pre-CARES Act limit of 60% of AGI.

Gifting to a Donor-Advised Fund

Donor-advised funds are a gifting strategy that allows the donor to gift cash or appreciated property to their fund and recommend grants to be distributed out of the fund to various public charities either in the year of the gift and/or in future years. The donor-advised fund is held at a religious-based or community foundation and allows for the family making the contributions to name the fund (e.g., The Smith Family Charitable Fund). Many taxpayers that want many of the benefits of a private foundation but aren’t interested in the additional oversight they require opt to utilize the donor-advised fund. At this time, there isn’t a distribution requirement annually for donor-advised funds, but there are different contribution limits: Cash gifts are limited to 60% of your AGI and gifts of appreciated property are limited to 30% of your AGI.

Gifting to a Private Foundation

Private foundations have their own limits of amounts that can be donated: Cash gifts are limited to 30% of your AGI and gifts of appreciated property are limited to 20% of your AGI. Private foundations have many additional layers of administration required each year by the families and support staff operating the organizations. These organizations pay a minimum excise tax of 1.39% on their net investment income and have annual distribution requirements.

Qualified Charitable Distributions

Utilizing the qualified charitable distribution (QCD) to donate to charity may be a tax-efficient strategy for taxpayers with large IRAs. A QCD is a direct transfer of funds from the IRA custodian to one or more public charities. The transfer results in a reduction of the taxability of your IRA distribution and the benefit is limited to $100,000 per year. Donor-advised funds and private foundations don’t qualify as recipients of a QCD. The QCDs are still available to those over 70.5 years old, although RMDs now aren’t required until age 72. If you are 72 or older, you may include any QCDs in your RMD calculation. You may request that more than the $100,000 per year limit be transferred to a charity, but the amount in excess of $100,000 will still be considered a taxable distribution.

Charitable Split-Interest Trusts

In addition to direct gifts of property that generate an immediate tax deduction, there are other charitable split-interest trusts that have annuity and charitable deduction components that benefit both the donor and charitable organizations.

Charitable remainder trust – This trust allows a donor to contribute assets (generally low-basis marketable securities), receive a tax deduction for the present value of the charitable beneficiaries’ remainder interest, receive an annuity stream back from the charitable remainder trust and terminate the trust at the end of the trust’s term with a residual donation to one or more charities. This charitable trust results in a great strategy for donors who would like to receive a tax deduction for a contribution while still continuing to receive an annuity stream back over the term of the trust.

Charitable lead annuity trust – This trust allows the donor to make a contribution to the trust resulting in a substantial tax deduction in the year of contribution. An annuity stream is paid out over the term of the trust to the charitable organizations (which can include public charities, donor-advised funds and private foundations), and the remainder interest in the trust at the end of the term transfers to the residual beneficiaries (either individually or in trust) gift or estate tax-free.

This is a great option if you have organizations that you’d like to make donations to annually and have a potential pool of assets to transfer to your heirs without utilizing any of your lifetime gift and estate exemption. If you have maxed out your lifetime exemption with recent estate and gift planning, it could be a beneficial solution to use a charitable lead trust to potentially transfer additional amounts to family members without incurring additional estate or gift tax while also benefiting charity.

These charitable trusts take time to establish and select the correct assets to contribute — and they have annual split-interest trust tax returns you must file with the IRS. You should consult your tax and estate planning advisors if either of these split-interest trusts sound like solutions for your personal, estate and gift, and charitable goals.

Other Charitable Considerations

Substantiating Charitable Gifts

For all gifts in excess of $250, the charitable organization (including donor-advised funds and your private foundation) should issue a receipt letter that details the gift the organization received. The receipt should be in writing (emails are sufficient), state the amount or value of the cash or property donated, describe the nature of any non-cash donation (e.g., XX shares of ZZ company stock), and disclose any goods or services provided by the organization to the donor in return for the gift provided.

Holding Period

The holding period of property donated can make a large difference in the amount of the taxpayer’s deduction on their tax return. For appreciated property, the tax deduction for the gift is the fair market value if the property donated in the hands of the donor was held for at least one year and one day (long-term holding period). If the holding period is short-term, only the cost basis of the appreciated property can be used as the tax deduction. The stock market in 2020 and 2021 generated large appreciation in newly acquired securities. You should consult your investment advisor to ensure that the holding period of any marketable security donated to a public charity, donor-advised fund or private foundation is considered before the asset is donated.

Timing of Gifts

As long as the gift you are donating is initiated before midnight on December 31, 2022, the gift is considered complete in 2022 for tax deductibility purposes. If you mail a donation to an organization and postmark the gift on December 31, 2022, the gift is considered made in 2022 even if the charitable organization doesn’t process the gift until several days later in the following year. It’s always recommended to use certified mail when mailing donations near the end of the year to substantiate the timing of the gift. If you are making a year-end contribution to a donor advised fund, please confirm if the fund is open on December 31, 2022 – they may only be open until Friday, December 30, 2022 (the last business day of the year).

Complex Gifts

If the gift you are intending to donate is more complex or more difficult to value, you should consider starting the discussion with the charitable organization receiving the contribution as early as possible. Many public charities and donor-advised fund sponsoring organizations have specific dates when they will no longer accept donations of complex assets. Complex assets can include partnership or LLC interests, stock in a private company or hard-to-value art or jewelry. Cash is generally the easiest gift to make up until the last day of the year. If you intend to donate marketable securities to a charitable organization, you should speak with the organization by mid-December to ensure they have the correct accounts set up to receive the donation.

Qualified Appraisals

If you make a gift of an asset other than cash or a marketable security that is worth more than $5,000, the IRS requires that you attach signed documentation from a qualified appraisal to the tax return to substantiate the gift. This applies to gifts of artwork, land, partnership interests and stock in a private company, to name a few. You should seek the qualified appraisal as near as possible to the date of the gift.

Bunching Charitable Gifts

The Tax Cuts and Jobs Act of 2017 increased the standard deduction for all taxpayers. For some taxpayers, it may be more beneficial to “bunch” charitable contributions for two years into one year. Many charitable organizations don’t operate on a calendar year and are just as happy to receive your year-end donation on December 31 as they are to receive it in the new year. This is a strategy that can be implemented with religious organizations for tithing, as well.

Wealth Transfer Planning

Why You Need to Act Now

Evaluating whether to make a taxable gift to reduce your estate tax exposure is an important consideration. The Tax Cuts and Jobs Act of 2017 changed the estate and gift tax regime by increasing the amount of assets an individual may pass to their heirs tax-free (referred to as the “lifetime exemption”). The amount of assets that can pass without being subject to the 40% estate/gift tax for 2022 is $12.06 million per person ($24.12 million per couple). This number is set to decrease to approximately half the amount of the exclusion in 2026.

As a result, making a taxable gift could be helpful to avoid paying gift/estate tax, as well as reducing the size of your estate, which could shift future appreciation out of your estate.

Estate Planning Before the End of 2022

With so much information in the media and on the internet, it can become overwhelming and difficult to make any kind of decision on what the focus of 2022 estate and gift tax planning should be given the short amount of time left in the year. Below is our list of the top considerations to focus on:

When we say use it or lose it, we mean it!

Our number one suggestion right now is to use the increased lifetime exemption before you consider any other technique. This can be done by making outright gifts or gifts to trusts. As a potential added benefit, if assets are transferred to a holding company such as an LLC prior to being gifted, it may be possible to gift interests in the LLC outright or in trust at discounted values. Below are some suggestions to use the exemption to make outright gifts to individuals or gifts to be held in trust for individuals:

  • Gifts of cash or marketable securities
  • Gifts of partnership interest at a discount
  • Gifts of S corporation stock or C corporation stock (including qualified small business stock) at possible discounts
  • Gifts of real estate (be careful if located in CA for property tax reassessments)
  • Forgive an intra-family note receivable
  • Sell an asset at a below-market rate, which will result in part gift/part sale
  • Gift tangible personal property such as collectibles (art, cars, wine, coins, etc.)
  • Gift of a partial interest in an asset

In addition, taxpayers owning businesses with outstanding PPP loans need to be careful if considering gifting interests in the business. See your tax advisor for additional guidance.

Sell a low-tax basis asset and gift the cash.

The idea of selling a low-basis asset and then gifting the cash might be more appealing for certain high-net-worth individuals. A parent might be better off paying the capital gains tax on the sale of an asset and then giving the full cash proceeds to the child rather than giving the child an asset with a low tax basis. Anytime a parent pays the income tax on assets that have been gifted or will be gifted, the payment of the income tax is basically a tax-free gift because it is not treated as a gift. Also, the payment of income tax by the parent removes that cash from their estate, which automatically saves estate tax at a 40% rate or potentially higher if the rates increase.

Assume a parent owns stock in a company and has a zero-tax basis in the asset. If the parent gifts $10 million of the stock to the child (outright or in trust), the parent will use $10 million of their lifetime exemption, however, the child will have an asset with unrealized capital gains that could be taxed as high as 39.6%, if sold in the future and there are no separate capital gain rates. The net gift would be worth $6,040,000, after tax.

However, if the parent sold the stock before the end of 2022 and gifted cash to the child, the parent would use $10 million of their lifetime exemption and pay income tax equal to $2.4 million (20% capital gains rate plus the net investment income tax of 3.8% = 24%). The child ends up with an asset with no unrealized capital gains and the parent removed an additional $2.4 million from their estate, which also saves estate taxes. Having the parent pay the capital gains tax on an asset to be gifted is basically a tax-free gift equal to the income tax paid.

This decision should be discussed with an estate attorney, CPA and investment advisor. Together, you can assess the situation based on the planned timing of the sale of the asset if it were to be gifted and determine if paying tax now will benefit the family overall.

You can still use the benefits of a grantor trust.

Currently, you can set up a trust that is a grantor trust for income tax purposes, but a completed gift for estate and gift tax purposes. This means that, though the assets won’t be included in your estate at your death, the income tax rules treat the trust as if it doesn’t exist, and you are taxed on all the income of the trust. This allows the trust to grow while you pay the taxes that the trust would pay in a non-grantor trust.

As with the above discussion of selling assets and gifting the cash, this is the equivalent of making additional gifts to the trust each year as you are paying the taxes on the trust income, without any gift tax implications. Though you can fund the trust with a gift to the trust, you can also sell assets to the trust and, since the trust is ignored for income tax purposes, the sale doesn’t cause a gain at the time of sale.

There are also other possible benefits included in setting up a grantor trust, depending on the provisions included in the trust agreement. For example, you should understand if you have the ability to swap out assets for other assets of equal value, tax-free, or if you can turn off the powers that make it a grantor trust (if your circumstances change and you no longer want to pay the taxes on the trust income).

It’s best to have flexibility in the trust, should there be future legislation that would eliminate some of the advantages currently available in this structure or changes in your circumstances. Ask your tax advisor to help you create this flexibility and plan for changes that can occur.

Use up one spouse’s exemption and keep the other.

If you are married and you are certain that you only want to make a $10 million gift or less, consider having one spouse use their lifetime exemption and the other spouse use zero of theirs.

For example, say that a husband and wife decide to gift $10 million to a trust for their children in 2022. If they split the gift, then the husband will use $5 million of his exemption and the wife will use $5 million of her exemption. In 2026 (or possibly sooner), when the lifetime exemption is reduced to an estimated $6 million per person (or even less), the husband will have used $5 million of his exemption, leaving $1 million, and the wife will have used $5 million of her exemption, leaving $1 million. If the husband had made the gift alone and used $10 million of his exemption, in 2026 he would have zero exemption remaining, while the wife would have the full $6 million remaining. This would allow the couple to shield another $4 million of assets from the estate tax even after the law changes.

Update your estate plan.

If you have incomplete estate planning documents, take this opportunity to address them, including wills, trusts or advanced health-care directives. If you have completed those documents but you haven’t updated them in the last few years (or you have had changes to your circumstances), be sure to review them and make necessary changes.

Confirm that all trust assets are in the name of your living trust to avoid probate at your death. Setting up the trust doesn’t avoid probate for any assets not transferred to the trust.

Review distribution powers of trusts and potentially make distributions to beneficiaries.

If the trust allows the trustee the discretion to make distributions to the beneficiaries, an analysis should be completed to determine if it makes sense to distribute out the ordinary income and possibly the capital gains. Though this may make sense for tax purposes, since trusts are taxed at the highest tax rate for any income over $13,450 in 2022, it should also be analyzed to take into consideration non-tax factors.

Even if it saves in taxes, some of the reasons that you may still not want to make the distributions to the beneficiaries are (1) the trust agreement may limit the trustee’s ability to make distributions and doing so could be in violation of the agreement, (2) assets kept in the trust are protected from the beneficiaries’ creditors and distributing assets out of the trust will subject the assets to those creditors, and (3) paying taxes may be a better idea than giving money to a financially irresponsible beneficiary.

Care should be taken when determining whether distributions should be made, but it is worth looking at to see if it makes sense. For a trust that can make discretionary distributions, the trust will have the first 65 days of 2023 to make those distributions.

Ultra-high-net-worth individuals can do more.

  • Although interest rates have increased six times this year and may continue to increase, there are some estate planning techniques that still may beneficial:
  • Grantor retained annuity trust
  • Sale to an intentionally defective grantor trust (discussed in more detail above)
  • Charitable lead trust
  • Refinancing old family loans
  • Sales of remainder interests
  • Annual exclusion giftingt
  • Paying tuition and medical expenses directly to the institution for loved ones
  • Funding §529 plans for children or grandchildren, including looking at funding with five years of annual exclusion gifts
  • Late allocation of unused generation-skipping transfer tax exemption to old trusts

Irrevocable Life Insurance Trusts

While not as popular in recent years as they once were, irrevocable life insurance trusts (ILITs) are still a part of many estate plans and may rise again in popularity with potential decreases to the estate tax exemptions. For those individuals who have already utilized these structures, particularly to the trustees named as stewards of those vehicles, there are several things to keep in mind as 2022 comes to a close.

First, these are not “set it and forget it” structures. The end of the year, in conjunction with other planning, is a perfect time to take another look at the policies held by the trust. Beyond being good practice, it is the responsibility of the trustee of an ILIT to review the insurance regularly and evaluate the insurance. Some of the areas to consider are as follows:

  • Is the policy functioning as intended, i.e., have there been shortfalls in funding, could there be better products available to meet intended goals, etc.?
  • Are the ownership and beneficiary designations up to date?
  • Is the insurance and the ILIT still serving a necessary or desired function with respect to the overall estate plan? Of course, a trustee may wish to, and in many cases should engage a professional to help make these determinations.

In addition to the need to review policies, individuals may desire to use existing ILITs for year-end gifting goals. While it appears that changes to the estate tax exemptions and grantor trust rules will not come to fruition before the end of 2022, it may still be advisable to consider pre-funding several years’ worth of premium payments for those ILITs with ongoing premium responsibilities. However, a review of the tax status of each ILIT should be undertaken prior to making any such gifts to avoid any unintended income tax consequences.

Finally, your year-end planning discussion with your advisor should explore how life insurance may serve as both an asset class and as part of your overall estate plan.

Key Factors

The following infographic provides some action items from this year’s in-depth year-end tax planning guide

2022 Year-End Tax Planning Guide for Individuals & Families - Key Factors Infographic

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