2022 Estate Planning: Tax Rules to Consider

If you're interested in minimizing your estate tax liability, it's a good time to keep up on federal and state legislative proposals.

A key proposal now pending at the federal level is called the American Families Plan. This legislation seeks to address education, health care and child care needs across the nation and looks to generate revenue by raising certain taxes, including a possible increase to federal estate taxes and a proposed income tax of built-in gains when an asset is gifted or at death.

In addition to the federal estate tax, 12 states and the District of Columbia impose their own state estate taxes, and six states impose inheritance taxes.

Here's what you need to know about potential estate tax changes at the federal level and strategies you may want to consider.


How Might Federal Tax Rules Change?

President Joe Biden's American Families Plan legislation, presented to Congress in late April of 2021, includes several changes that could impact the estates of wealthy individuals.

These changes could result in federal taxes as high as 61% on the wealth of high earners upon their death, according to an analysis by the Tax Foundation, an independent tax policy organization:

  • The legislation would impose an income tax on built-in capital gains worth over $1 million, either during lifetime or at death. This is a departure from current rules, which tax capital gains at the time an asset is sold.
  • Rather than apply the current capital gains tax rate of 20% plus a 3.8% tax on net investment income (NII), the proposed legislation would tax those gains at ordinary income tax rates.
  • ·The American Families Plan proposes that the top capital gains rate increase to 39.6% on taxable income greater than $1 million, which would bring total tax to 43.4% once the 3.8% tax on NII is added.
  • Today, estates worth more than the estate tax exemption amount of $11.7 million are subject to an estate tax of 40%. While currently set at $11.7 million, the exemption amount could potentially be reduced, possibly to the pre-2018 level of $5.49 million (adjusted for inflation).

What this means when an estate transfers an appreciated asset to an heir — such as stock in a high-growth company, a family home, or a business — is that the estate could be responsible for paying up to 61% of the asset's value in income and estate taxes.


What About State-level Estate Taxes?

12 states and the District of Columbia have estate taxes on the books and six have inheritance taxes – and several are making changes to their rules this year.

For example, the District of Columbia reduced its estate tax exemption from $5.67 million to $4 million in January 2021, reports Forbes.

In addition, five states are enacting rate changes, inflation adjustments or changing exemption amounts. Historically, many state-level estate tax rules were tied to federal rules that allowed a federal estate tax credit for estate taxes paid to states. When that rule expired, estate taxes in many states expired with it, according to the Tax Foundation.

However, with state budgets crippled after more than a year of providing pandemic relief, establishing or increasing state estate taxes is viewed as a potential revenue generator for state coffers.


How To Protect Your Estate

It remains to be seen whether Congress will pass the proposed federal tax law changes, and whether states will continue to show interest in taxing estates and inheritances.

However, individuals with large estates may want to take some important steps to protect their legacies.

Consider Making Gifts

The lifetime exemption for making gifts to heirs and trusts without paying gift taxes is currently $11.7 million. If the proposed built-in gains tax were to become law, then individuals might want to consider making gifts now, both taking advantage of the existing lifetime gifting exemption and also avoiding the taxation of built-in capital gains on future gifts made. If the American Families Plan were to become law, gifts of appreciated assets to your heirs made after the effective date would require the recipient to pay capital gains taxes on the appreciated value of the assets. Speak with your tax advisor to see if, based on your goals and objectives, it would make sense to make gifts now before the new legislation takes effect.

Meet With an Estate Planner

Even if you already have an estate plan in place, now is a good time to revisit it and discuss potential changes with your estate planning attorney – they may be able to help you create a flexible estate plan that can be adjusted in case of federal or state tax law changes.

Keep an Eye Out for Future Developments

There is the potential for a number of changes regarding estate taxes in the coming months. Pay close attention to what's happening in your state legislature and in Congress.

"While it is necessary to consider any potential tax law changes, it is even more important to evaluate these proposals within the context of your personal goals and priorities and take appropriate action based on your short-term and long-term objectives in consultation with your tax and estate planning advisors," recommended Nichole Walker, senior wealth planner at City National Bank.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice and any information provided in this article should not be construed as such. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.