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If You Use it, You Won't Lose It: IRS Says Taxpayers Won't Lose Benefit of Higher Gift Tax Exemption

By Anthony P. Daddino on November 21, 2018

Apparently the IRS is feeling the holiday spirit. The IRS just proposed regulations allowing taxpayers to lock-in the higher gift tax exclusion amount, which was raised under the 2017 Tax Act from $5 million to $10 million per person (indexed for inflation).  For married couples, the combined exclusion amount for 2018 is $22,360,000.   Under these proposed regulations any future decrease in the exclusion amount will not cause otherwise non-taxable transfers made at a time when the exclusion amount was higher to be taxable - ever.  Thanks Uncle Sam!

Background

In computing the amount of Federal gift tax to be paid on a gift or the amount of Federal estate tax to be paid at death, the gift and estate tax provisions of the Internal Revenue Code (Code) apply a unified rate schedule to the taxpayer’s cumulative taxable gifts and taxable estate on death to arrive at a net tentative tax. The net tentative tax then is reduced by a credit based on the applicable exclusion amount.   Prior to January 1, 2018, for estates of decedents dying and gifts made beginning in 2011, section 2010(c)(3) provided a basic exclusion amount of $5 million, indexed for inflation.   The credit is applied first against the gift tax, on a cumulative basis, as taxable gifts are made. To the extent that any credit remains at death, it is applied against the estate tax.   The 2017 Tax Cuts and Jobs Act doubled the exclusion for estate taxes to $10 million until the end of 2025, indexed for inflation.  The exclusion amount for 2018 is $11,180,000 per person.  The exclusion is scheduled to revert to the pre-TCJA amount of $5 million in 2026.

Issue

If taxpayers make gifts that were exempt from tax during this period of increased exemption amount and then either die or make another gift after 2025, when the exemption amount decreases, what happens?  Will the gift that was exempt from gift tax when made have the effect of increasing the gift or estate tax on the later transfer (in effect, subjecting the earlier gift to tax even though it was exempt from gift tax when made)?

Proposed Regulations

Under the proposed regulations, linked here, the IRS has unequivocally answered No. The IRS even included an example that in no-uncertain terms states that the prior transfer is forever exempt from tax:  “For example, if a decedent had made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by a BEA [Basic Exclusion Amount] of $10 million applicable on the dates of the gifts, and if the decedent died after 2025 when the BEA was $5 million, the credit to be applied in computing the estate tax is that based upon the $9 million of BEA that was used to compute gift tax payable.”

Take-Away

While the regulations are not yet final, the IRS’ efforts to provide tax certainty are welcomed as year-end planning opportunities draw near.  Tax practitioners would be well advised to visit with their clients about potential wealth succession planning that would help insure that taxpayers take full advantage of the higher exemption amounts before they are truly lost. 

If you have any questions on this blog post or any other tax-related topic, please do not hesitate to contact me at (214) 749-2464 or adaddino@meadowscollier.com.