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Navigating the Estate Planning Landscape

Updated: May 17

changes in estate planning
Estate Planning Changes

The only constant in estate planning is change. While you can do your best to be proactive and stay abreast of changing regulations, it seems there is always something new with which to contend. Despite all the uncertainty, there have been some positive developments for taxpayers this year. They include:

Annual Gift Tax and Estate Tax Exclusions Are Increasing

For the first time since 2018, the amount of money you can gift someone without filling out a gift tax form is increasing to $16,000 for singles and $32,000 for married couples. If you give more than that, you will need to fill out Form 709, the gift tax form. Rising rates of inflation are the reason behind the increase.

Also in 2022, new federal estate and gift tax exemptions will increase to $12,060,000 per person. This increase also means that the lifetime tax exclusion for gifts will rise to $12,060,000, as will the generation-skipping transfer tax exemption. That means that even if you file Form 709, you will only owe taxes if you have given away more than $12,060,000 in the past.

Required Minimum Distributions

New life expectancy tables used in determining Required Minimum Distributions (RMD) from IRAs and retirement plans also went into effect as of January 1, 2022. These changes will impact those who have already reached their Required Beginning Dates for taking RMDs, qualified retirees, and beneficiaries of inherited retirement plans or IRAs. Your plan administrator or financial advisor can help you understand how such changes may impact your plan.

Back Door Roth IRAs Still in Play

Congress is considering legislation that would greatly reduce the benefits of certain IRAs, but negotiations have stalled in 2022. Initial proposals to limit Roth IRA conversions have not yet been enacted. That means the loophole commonly known as “back door” Roth IRAs have not been eliminated for 2022. Lower distribution means less taxable income. Using back door Roth IRAs helps you to continue to preserve and even grow your principle – so long as the market conditions remain favorable.

Bear in mind that in an IRA transfer or conversion to a Roth IRA, you will be required to pay taxes on any money in your traditional IRA that has not been taxed already. Let’s say you contribute $5,000 to a traditional IRA, then claim a deduction for that amount on your tax return. If you then opt to convert that money to a Roth IRA, you will owe taxes on that $5,000. Additional taxes will be owed on any money that IRA contribution earned between the date it was initially contributed to the traditional IRA and when you opted to convert it to a Roth IRA.

COVID-19’s Continued Role

The COVID-19 pandemic continues to play a role in almost every facet of our lives. While no formal legislation has been passed surrounding estate planning and the pandemic, now is as good a time as ever to get your affairs in order. This is especially true for advanced healthcare directives. Should the time come when you are unable to speak up about your preferences, you will be glad you outlined your wishes via your estate plans.

What This Means for Your Estate Plans

There has never been a better time to make additional gifts in order to reduce your taxable estate. If you have been considering gifting your loved ones college tuition money or closing costs on their first home, 2022 offers you the flexibility to do so. Since gifts for medical or educational purposes do not count toward your lifetime exemption, it is an even better idea to put your money to good use in this way. If you are going this route, avoid giving cash directly to your loved one; instead, make sure to pay the hospital or university yourself.

Update Your Estate Plans Now

Making sense of estate planning laws often requires professional help. If you are unsure of how to best reduce your taxable estate by making additional gifts in 2022, it is important to consult with your financial advisor and estate planning attorney. It is also a good time to update your beneficiaries, get your advance directive on record, and factor in any changes you have made to your digital estate. Call us today at (281) 218-0880 or schedule online here to get the wheels in motion to best protect your legacy and loved ones far into the future.

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