January 13, 2020
Authored by: Linsey Glosier and Tiffany McKenzie
The Treasury Department issued final regulations on November 26, 2019 (Treasury Decision 9884) confirming that taxpayers will not be subject to “clawback” of the value of their pre-2026 gifts of the temporarily increased gift and estate tax exemption.
Pursuant to the final regulations, taxpayers will be able to use (prior to 2026) the full increased gift and estate tax exclusion that became available beginning in 2018 under the citing the Tax Cuts and Jobs Act (TCJA) without concern that the IRS may attempt to include gifts that exceed the post-2025 exclusion amount in the taxpayer’s taxable estate at death. This concern that lifetime gifts in excess of the exclusion amount at death might be included in the taxable estate of the decedent has come to be known as “clawback.” The TCJA itself directed the IRS to publish regulations clarifying the clawback question and related issues.
Under the TCJA, the gift and estate tax exclusion temporarily increased from $5 million adjusted for inflation ($5.49 million in 2017) to $10 million adjusted for inflation ($11.58 million in 2020). However, that provision of the TCJA is scheduled to sunset on December 31, 2025, meaning that each taxpayer’s gift and estate tax exclusion amount will revert back to $5 million adjusted for inflation beginning in 2026. Therefore, under the final regulations, if a taxpayer makes a gift in 2025 of the taxpayer’s full gift tax exclusion amount of $10 million adjusted for inflation, and the taxpayer dies in 2026 after the exclusion has reverted to $5 million indexed for inflation, no part of the gift made in 2025 will be pulled back in to the decedent’s gross estate.
The final regulations also provide a special rule that allows a decedent’s estate to compute its estate tax applicable credit amount using the higher of the exclusion amount applicable to gifts made during life or the exclusion amount applicable at the time of death. The intent of this provision of the regulations is to address concerns that estate tax could still apply to gifts that were excluded from gift tax at the time they were made. In addition, the final regulations clarify that in the event the spouse of a taxpayer dies during the temporary period of increased exclusion amount will be able to use the full deceased spousal unused exclusion (DSUE) reflected on the the deceased spouse’s estate tax return, even if the taxpayer dies during a period when a lesser estate tax exclusion is in effect.
If the increased gift and estate tax exclusion has not been extended as 2026 edges closer, estate planners will be advising their wealthy clients who can afford to part with such a large amount of money to make gifts that will use the remainder of the client’s increased exclusion. These final regulations will provide peace of mind for taxpayers and estate planners alike that these gifts, once made, will not be subject to clawback.