As we all know, the 2017 Tax Cuts and Jobs Act (TCJA) granted a doubled estate and gift tax exemption to the rich by essentially increasing the unified credit basic exclusion amount for gift and estate taxes by nearly $6 million, from $5.49 million per individual (in 2017) to $11.4 million per individual (in 2019), with the increase set to sunset in 2026.
Due to the large estate tax exemption available to taxpayers through 2025, many estate planners have been urging wealthy clients to make large lifetime gifts to take advantage of the extra $6 million exemption amount, with the caveat that it was not completely clear whether the IRS would ultimately view the increased exemption amount as a ‘loan’ or as a permanent gift. For example, if a taxpayer was to make a $7 million gift in 2018, and the taxpayer died in 2026 when the estate tax exemption is set to revert to $5 million, it was unclear as to whether the taxpayer would owe tax on the extra $2 million gift.
In a holiday gift to taxpayers (especially the very wealthy), the IRS recently issued a notice of proposed rulemaking regarding the clawback concerns and related adverse impacts on gift and estate tax amounts. In a nutshell, the proposed regulations indicate that taxpayers can now pass on tens of millions of dollars estate and gift tax-free, without fear of incurring tax on the gifts at a later date. In the example above, this means that the full $7 million would be exempt from gift and estate tax.
Essentially, the new proposed regulations indicate that gifts made between 2018 and 2025 will be sheltered by the increased basic exclusion amount, and those gifts will not be subject to estate tax in 2026 and afterwards when the increased basic exclusion amount disappears.
These new provisions should alleviate the concerns taxpayers had as to whether to utilize the increased exemption before it disappears in 2026.
It is important to note that these regulations are only proposed, so a cautious taxpayer may want to wait until the proposed regulations are actually adopted before relying on them; however, the general feeling is that they will be accepted without incident.