Legal alert | Real estate planning solutions for the end of the year 2022

By most accounts, 2022 has been a turbulent year from a planning perspective: uncertainty about the midterm elections, stock market volatility, soaring interest rates, and the highest level of inflation in recent history all played a role. Although 2022 brought challenging market dynamics, the tax environment is one of the few things that has remained relatively constant.

Despite the many twists and turns in the various tax law proposals that have been discussed over the past two years, no major changes have been enacted. While acknowledging that legislation can change at any time and that flexibility is key, the end of consolidated democratic control in Washington greatly reduces the odds of major changes to the federal tax code in the near future. This, in turn, allows taxpayers to look beyond the end of 2022 and position themselves to take advantage of opportunities in the upcoming planning environment.

Sunset tax exemption on transportation

Transfers of wealth during life and at death may be subject to certain transfer taxes at the federal level, including a gift tax, an estate tax, and a transgenerational transfer tax; However, each taxpayer may transfer a certain amount of their assets before any transfer taxes apply. This exemption amount is determined—and amended from time to time—by an Act of Congress. As part of the Tax Cuts and Jobs Act of 2017 (TCJA), Congress temporarily increased the exemption amount to $12,060,000 per person for 2022, adjusted for inflation, and is set to increase to $12,920,000 per person for 2023. .

The TCJA also included final provisions that would reduce the exemption amount by approximately 50% unless Congress takes additional action before January 1, 2026. Given the current political landscape, such a major legislative act seems unlikely; Therefore, taxpayers should take advantage of the current exemption amount level while it is still available.

The effect of interest rates on estate planning

Each month, the Internal Revenue Service (IRS) publishes two interest rates that have an impact on planning strategies: the applicable federal rate, or AFR, and the Section 7520 rate. The total interest rate reflects the minimum interest rate that must be charged on loans between related parties based on the length of the loan. . The Section 7520 rate is used to calculate the value of some annuity payments and residual interest for split-interest trusts.

Because the AFR rate and the Section 7520 rate are used when implementing a number of estate planning techniques, the effectiveness of these techniques changes as interest rates change. Although rates have risen sharply from record lows seen in 2020 and 2021, current rates are still low by historical standards, but are likely to continue to increase in 2023 (see below for a chart of rates applicable for 2020). 2022). Taxpayers should consider strategies that will enable them to stabilize current interest rates, which remain relatively low, and prepare to take advantage of potentially higher interest rates in the near future.

*Based on the annual installation period

Planning strategies for high and low interest rate environments

Many estate planning strategies involve taking advantage of lower interest rates in order to transfer the value of the assets to the beneficiaries free of transfer taxes. Generally, these techniques enable older family members to (1) “freeze” the value of assets that would otherwise have been included in their estate for estate tax purposes, and (2) transfer the appreciation to younger family members or trusts for their benefit.

However, as rates continue to rise, taxpayers will begin to see greater benefit from strategies that take advantage of higher interest rates to reduce the actuarial value of the taxable gift. The higher the rate, the more appropriate these strategies are.

Click the links below to read more about effective planning strategies suitable for high and/or low interest rate environments, including intra-family loans, annuity sales of intentional irrevocable trusts (IDIT), grantor-held pension funds (GRAT) ), Charity Annuity Trust Trusts (CLAT), Charity Pension Residual Trusts (CRAT), and Qualified Personal Residence Trusts (QPRT).

What does this mean for you

The combination of rising interest rates and the expiration of the record high forgiveness amount creates a number of unique planning opportunities in the final weeks of 2022 and as we head into 2023. Under these circumstances, it is important to keep in mind that the strategies discussed in this article must be implemented and managed. with great care in order to achieve the intended tax efficiency.

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If you have questions or would like to discuss how you can use these and other strategies to help achieve your planning goals, please contact a Husch Blackwell Member Private Wealth Team Or your Husch Blackwell attorney.