Because of the larger exclusion and lower tax rates, there may be unprecedented opportunities for gifting.
By making gifts up to the exclusion amount, you can significantly reduce the value of your estate without incurring gift tax. In addition, any future appreciation on the gifted assets will escape taxation. Assets with the most potential to increase in value, such as real estate (e.g., a vacation home), expensive art, furniture, jewelry, and closely held business interests, offer the best tax-savings opportunity.
Gifting may be done in several different forms. These include direct gifts to individuals, gifts made in trust (e.g., grantor retained annuity trusts and qualified personal residence trusts), and intra-family loans. Currently, you can also employ techniques that leverage the high exclusion to potentially provide an even greater tax benefit. For example, creating a family limited partnership may also provide valuation discounts for tax purposes.
For high-net-worth married couples, gifting to an irrevocable life insurance trust (ILIT) designed as a dynasty trust can reduce estate size while providing a substantial gift for multiple generations (depending on how long a trust can last under the laws of your particular state). The value of the gift may be increased (leveraged) by the purchase of second-to-die life insurance within the trust. Further, the larger exclusion enables you to increase, gift tax free, the premiums paid for life insurance policies that are owned by the ILIT or other family members.
Premium payments on such policies are taxable gifts, so these premium payments are often limited to avoid incurring gift tax. This in turn restricts the amount of life insurance that can be purchased. But the increased exclusion provides the opportunity to make significantly greater gifts of premium payments, which can be used to buy a larger life insurance policy.
Before implementing a gifting plan, there are a few issues you should consider.
Caution: The amount of gift tax exclusion you used in the past will reduce the $12.06 million available to you in 2022. For example, a person who used $1 million of his or her exclusion in 2012 will be able to make additional gifts totaling $11.06 million during 2022 free from gift tax.
Tip: In addition to this opportunity to transfer a significant amount of wealth tax-free, it's important to remember that you can still take advantage of the $16,000 (in 2022, $15,000 in 2021) per person, per year annual gift tax exclusion. Also, gifts of tuition payments and payment of medical expenses (if paid directly to the institutions) are still tax-free and can be made at any time.