Some people with substantial wealth have been hesitant to take advantage of the increase in the estate and gift tax exemption included as part of the 2017 Tax Cuts and Jobs Act. Questions about whether the Internal Revenue Service would clawback gifts to increase the size of estates once the exemptions revert to pre-TCJA levels in 2026 have now been answered with an announcement by the IRS that gifts made under the new exemption amount would not be affected by the sunset provision included in the law.
Impact of the Tax Cuts and Jobs Act of 2017
When it was signed into law in 2018, the TCJA increased the federal estate and gift tax exemption from $5 million to $10 million per person. The inclusion of a provision allowing for annual adjustments for inflation means an individual can exempt up to $11.4 million of wealth from gift and estate taxes in 2019. For a married couple, the exemption works out to $22.8 million.
It will be even more in 2020 with the inflation adjustment. A person will be able to exempt from taxation of gifts and estates valued up to $11.58 million and $23.16 million for married couples.
Doubling of the exemption came with a catch. The TCJA contained a sunset provision that causes the estate and gift tax exemption to revert to pre-2018 levels on January 1, 2026. Congress could, of course, pass legislation extending the TCJA exemption beyond 2026 just as it could elect to revoke all or portions of the act depending upon the outcome of the 2020 presidential and congressional elections.
Future legislative action by Congress was not the only concern people had about the benefits offered by doubling the exemption. Under the provisions of the law, donors could reduce the amount of taxes payable by their estates upon their death by making large gifts during their lifetime. The effect would be a reduction in their taxable estates through a gift that would not be subject to a gift tax if the size of the gifts were kept at or below $11.4 million per single donor or $22.8 million for gifts given by a married couple.
Proposed IRS regulations released following the enactment of the TCJA raised concerns about the tax-exempt status of gifts made before the end of 2025 once the exemptions reverted to pre-TCJA amounts. Some experts questioned whether the amounts of those gifts would be included in the estates of individuals dying after January 1, 2026. For example, an $8 million gift to a child given in 2019 would be exempt from gift taxes, but would the reversion of the exemptions to pre-2018 levels cause the amount of the gift to be added back to increase the taxable amount of the estate of a donor dying after January 1, 2026?
Final IRS Regulations Set Minds at Ease
The final version of the IRS regulations applicable to the TCJA should set minds at ease. Addressing concerns about clawback of gifts made pre-2026, the IRS confirmed that benefits derived through estate planning using the more generous estate and gift tax exemption will not be lost upon reversion of the exemption to pre-2018 levels.
A statement released by the IRS specifically referenced the concerns people had when the proposed regulations were issued. Whether done through gifts given outright or through a trust, wealthy individuals may do so safely in the knowledge that their estates will realize the benefit of gifts made prior to the end of 2025.
Speak to an Estate Planning Attorney
As the clock winds down on the enhanced estate and gift tax exemption, it becomes essential to speak with one of the estate planning attorneys at Magee & Adler to determine how to make optimal use of it. Call us now at 562-432-1001 to schedule an appointment.