IRS issues estate tax anti-clawback regs

Tax Hot Topics newsletter The IRS issued final regulations (T.D. 9884) on Nov. 22 providing that the benefit of the temporary increase in the gift and estate tax basic exclusion amount would not be clawed back on the taxpayer’s subsequent death after 2025.

The Tax Cuts and Jobs Act increased the gift and estate tax basic exclusion amount was increased from $5 million to $10 million, prior to an inflation adjustment. However, the benefit expires on Jan. 1, 2026.

This raised questions regarding what would happen if a taxpayer made gifts of $10 million prior to January 2026 and then died after that date, when the exclusion amount had reverted back to $5 million. Taxpayers were concerned the benefit of the additional $5 million that was gifted prior to 2026 could be clawed back in the calculation of the estate tax liability on the taxpayer’s death after 2026 because the gift and estate tax calculation is a unified calculation.

In the proposed regulations issued in November 2018, the IRS stated its view that Congress intended the benefit to apply to all gifts prior to 2026 and that the benefit was use-it-or-lose-it nature. The proposed regulations provided that if a taxpayer made a taxable gifts with a cumulative total of up to $10 million prior to 2026, there would be no gift tax due on the amounts of the gifts up to the $10 million exclusion. If the taxpayer did not take advantage of this benefit prior to 2026, the benefit would not be available to any gifts after 2025.

The final regulations largely adopted the proposed regulations with some limited changes in response to public comment.

Examples in the final regulations provide inflation adjustments, which the proposed regulations did not. For example, the $10 million basic exclusion amount with the inflation adjustment has grown to $11.58 million for 2020 gifts. The finial regulations clarified that the benefit of the increase was a use-it-or-lose-it benefit that would only apply to gifts actually made prior to 2026.

The final regulations also clarify that the increase in the basic exclusion amount for the first-to-die spouse will increase the deceased spouse’s unused exclusion available to the surviving spouse, if the first spouse to die dies prior to 2026. This unused exclusion is fixed at the first spouse’s death and will not be reduced if the surviving spouse lives into 2026. Although the surviving spouses own exclusion will be reduced if they live into 2026.

The final regulations did not address the generation-skipping tax. In addition, the IRS stated that the application of these rules to completed gifts made prior to 2026 that are also included in the taxable estate of decedents dying after 2025 is reserved for further consideration.

Brad Roe
Managing Director
Houston Office
T +1 832 476 5080

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.