Ready to do some estate planning, but worried that the rug could be pulled out from under your feet once the Tax Cuts and Jobs Act (TCJA) expires? There’s some good news: The Internal Revenue Service (IRS) has confirmed that making large gifts now won’t harm estates after 2025.
The final Regs clarity that taxpayers who take advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025. Previously, it wasn’t entirely clear what would happen when the exclusion amount dropped to pre-2018 levels (assuming that the tax benefits under the TJCA do expire).
Now, taxpayers who hoped to make substantial gifts between 2018 and 2025 can do so without worrying that they’ll lose the benefit of the tax-free transfer.
Typically, federal estate and gift taxes are calculated using a unified rate schedule on taxable transfers of money, property, and other assets. Even you make a taxable gift during your lifetime, you generally don’t pay tax at the transfer; instead, you chip away at your lifetime exclusion amount. So, if you make a taxable gift of $1 million during your lifetime, it would merely reduce your lifetime exclusion amount. That amount for 2019 is $11.4 million. So, you’d have $10.4 million available to gift and pass at your death without paying tax.
But what would happen if, in 2026, you made $6 million in gifts (not taxable from 2018 to 2025)? The applicable exclusion amount at that time should drop down to $5 million. So, taxable?
Not under the Regs. Currently, the applicable exclusion amount is the sum of the basic exclusion amount (BEA). The Regs now stipulate that the estate can compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.
Here’s an example from the Regs:
Individual A (never married) made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative total of $11.4 million in basic exclusion amount allowable on the dates of the gifts. The basic exclusion amount on A’s date of death is $6.8 million. A was not eligible for any restored exclusion amount pursuant to Notice 2017-15. Because the total of the amounts allowable as a credit in computing the gift tax payable on A’s post-1976 gifts (based on the $9 million of basic exclusion amount used to determine those credits) exceeds the credit based on the $6.8 million basic exclusion amount allowable on A’s date of death, this paragraph (c) applies, and the credit for purposes of computing A’s estate tax is based on a basic exclusion amount of $9 million, the amount used to determine the credits allowable in computing the gift tax payable on A’s post-1976 gifts.
You can find more examples in the Regs. The Regs are currently unpublished, but you can view them in advance here (downloads as a PDF). They are scheduled to be published on November 26, 2019.