Proposed regulations on gift and estate tax exemption offer flexibility for estate planning

Tax Hot Topics newsletterThe IRS has released proposed regulations (REG-106708-18) to address issues stemming from the temporary doubling of the gift and estate exemption by the Tax Cuts and Jobs Act (TCJA). The guidance most notably offers taxpayers flexibility to use the full gift tax exemption without fear the IRS could enforce a “claw-back” that would subject the gifts to tax if the taxpayer dies after the increased gift and estate tax exemptions expire.

Generally, the estate and gift tax exemptions are unified so that the amount of gifts made over a taxpayer’s lifetime counts toward the combined basic exclusion amount (BEA). The TCJA doubled the BEA from $5 million to $10 million (adjusted annually for inflation), but only for years 2018 through 2025, after which the BEA automatically reverts to $5 million.

This sunset of the doubled exemption created potential uncertainty for gifts made throughout a taxpayer’s life while the BEA is $10 million if the death occurs after the BEA is potentially halved.

The rules provide that estate tax can be determined using the exemption amount allocated to gifts made during the double exemption period or the BEA at the time of death, whichever is greater. However, taxpayers who do not fully gift against the $10 million during the applicable period forfeit that portion of the benefit. For example, for a taxpayer who makes $9 million in gifts from 2018 through 2025 and then dies in 2026 with a $1 million estate, the credit applied against their estate tax is based on a $9 million BAE.

The proposed rules will be effective when made final. The comment period ends Feb. 21, 2019, with a public hearing scheduled for March 13, 2019.

Brad Roe
Managing Director
T +1 832 476 5080

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