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November 25, 2019

IRS Confirms No Clawback for Gift and Estate Tax Exclusion – Act Now for the Biggest Benefit

The Treasury Department and the Internal Revenue Service (IRS) recently issued final regulations around the increased gift and estate tax exclusion amounts in effect from 2018-2025. The final regs confirm that individuals who take advantage of the increased gift and estate tax exclusion amounts will not be adversely impacted after 2025 when the exclusion levels are scheduled to drop to pre-2018 levels.

History of the Estate and Gift Tax Exemption Increase

The Tax Cuts and Jobs Act of 2017 doubled the estate and gift tax exemption, raising the base amount of $5 million to $10 million per person. This amount is how much an individual can give away tax-free, avoiding the estate tax rate of 40%. With inflation adjustments, the current estate tax exemption amount is $11.4 million per person. But the estate tax bump is temporarily scheduled to decrease after 2025. The question that was brought up frequently was whether gifts would be taxed later when the exemption fell. The proposed rules issued last year said no, however, there was no certainty and still many questions.

With the Treasury and IRS now issuing IR-2019-189, this now confirms that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025, will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. According to the IRS, individuals planning to make large gifts between 2018 and 2025 can now do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

Benefits for Year-End Tax Planning

So, what does this mean for year-end tax planning? The regulations confirm that there will be no clawback for huge wealth transfers made under the Trump tax law. Although this is really no big surprise, as they follow the proposed rules that were issued a year ago. However, these final regulations provide finality and certainty—a reason for you and your estate lawyers to act and make gifts now, worry-free.

For example, in 2019, say that you put $10 million in a trust for your heirs, and you die in 2026 when the estate tax exemption possibly reverts to $5 million. Your estate wouldn’t have to pay tax on that extra $5 million gift. Instead, under the new regulations, the IRS says that the full $10 million in this example would be exempt forever.

The final regulation addresses concerns that were raised in public comments and includes several examples that show how these calculations work. It remains a complicated area with a lot to understand, such as the basic exclusion amount (BEA), the deceased spousal unused exclusion (DSUE), and the generation-skipping transfer (GST).

Note that the IRS stresses this only works if you make gifts during the 2018-2025 time period. The regulation examples make it clear that gift-givers get the benefit of inflation adjustments. Since this benefit is “use it or lose it”, the time to act is now. The Anders Family Wealth and Estate Planning Services Group can help determine the best utilization for your situation. Contact an Anders advisor for more information. Read the full rule in the Federal Register.

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