There is much in the news today surrounding the proposed state and federal tax changes that will impact our Florid estate planning strategies. From the possible removal of both the step up in basis planning technique to the removal of grantor trust planning, at times there can appear to be little to remain positive about. For most of our hardworking Florida clients, they share the goal to leave a legacy for the next generation. This noble effort can be complicated when there are continued discussions to change the strategies that they are relying on with their Florida estate planning attorney.
Amidst this chaos, however, there is good news we want to share with you. Despite many of the proposed changes that could negatively impact your Florida estate planning, now there is a new higher federal estate tax exemption that is set to start in 2022. The IRS announced these new numbers in Rev. Proc. 2021-45, and shared that the new numbers have been adjusted upwards to reflect ongoing inflation.
This is a positive change that we want to see for our clients. As a quick refresher, the federal estate tax is a death tax. Under the current rules, it is assessed at rates that quickly climb to 40% (any taxable amount beyond $1M is taxed at 40%, while taxable amounts below that threshold will be taxed at lesser rates on a graduated scale). This means that any Florida estate at death that has assets over the exemption amount will be taxed. Florida is one of the states in our nation that does not assess a state tax at death. Instead, if you pass away with your asset limit below the federal exemption amount, you will not have to pay death taxes. As a Floridian, the key to strong estate planning is working with an experienced Florida estate planning attorney who can create a plan to reduce your taxable estate at death.
Under the new rules, the federal estate tax exemption amount is:
• $12.06 million per individual (up from $11.7 million in 2021)
• $24.12 million per married couple
Since the reformation of the federal estate tax structure in 1976, the exemption amount has only increased. While most of the changes have been historically modest, reflecting inflation in most years, this is not always the case. For example, there have been significant jumps in years such as 2002 when the amount changed from $675,000 to $1 million and again in 2018 when the amount changed from $5.49 million to $11.18 million. Despite this positive historical pattern, however, the concern remains that in 2026 the federal estate tax is subject to drop down to $5 million (indexed for inflation).
There is more good news to focus on as well. The annual gift exclusion has also been raised to $16,000 per person for 2022, after not moving upward since 2018. This means that you can pass this amount of money during life, tax free, to another individual. For example, a couple with three children could give up to $96,000 tax free as each spouse could give the full $16,000 to each child. If there was a trusted spouse of each child, the couple could give another $96,000 tax free for a total tax free transfer of $192,000. By transferring wealth early through lifetime gifts, you can potentially limit your tax exposure. We would caution you, however, that before making an unencumbered transfer of that size, you should meet with your Florida estate planning attorney to discuss the best way to proceed.
The key to success in any strategy that involves passing wealth to your heirs begins with working with an experienced Florida estate planning attorney. Your attorney will stay current on laws that may both positively or negatively impact your estate planning and keep you updated on changes that need to be made. As we watch as the possible and actual changes to the estate and trust planning landscape change, we encourage you to build a relationship with an experienced estate planning attorney you trust to ensure you, your family, and your legacy remain protected. You are welcome to contact our office now, or any time throughout the year, to schedule an appointment to get the representation and answers you need.