The Tax Cuts and Jobs Act signed into law last year did not include the hoped-for repeal of the federal taxation of gifts and estates. Instead, Congress opted to increase the Basic Exclusion Amount, which effectively eliminated gift and estate taxes for most people. The effect of the increase in the BEA has been questioned in light of the temporary nature of the increase with the BEA scheduled to revert to its current level on January 1, 2026. The IRS has attempted to address those concerns by proposing new regulations.
Gifts as Part of an Estate Plan
Assets passing to heirs at the time of death are subject to an estate tax. Instead of waiting to distribute assets at death, you could gift them during your lifetime to avoid or minimize your estate tax liability. That has been a tried and true planning technique for many years.
Federal tax laws permit the transfer of assets to individuals during your lifetime in the form of gifts. The law allows you to gift up to $15,000 (as increased periodically based on CPI) annually per an individual without incurring any gift tax liability.
When a gift exceeds $15,000 in a calendar year to an individual, the gift taxes owed are avoided by using the lifetime credit that each of us is given. For gifts made and estates of decedents dying before Jan. 1, 2018, prior law provided an exclusion from taxable gifts or estates of $5 million, indexed for inflation after 2011. For gifts made or estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026, the new tax act increased the amount to $10 million, also indexed for inflation after 2011. As a result, the amount for 2017 was $5.49 million. For 2018 it was $11,180,000. For 2019 it is $11.4 million.
You can apply as much of the gift and estate tax exemption to reduce gift taxes you would owe during your lifetime with the balance of the exemption being applied to offset any taxes owed on your estate at your death. How a strategy of reducing your estate taxes by divesting yourself of assets through gifts during your lifetime would work under the Tax Cuts and Jobs Act provision restoring the exemption to pre-legislation levels concerned attorneys, accountants, and financial planners.
IRS Eases Clawback Concerns
On final approval of the proposed regulations, people taking advantage of the increase in the gift and estate tax exemption need not fear a gift or estate tax problem when the exemption reverts to $5,000,000 in 2026. According to new regulations proposed by the IRS, if you used the higher exemption amount to offset lifetime gifts, you will not be forced to pay taxes retroactively simply because the exemption is lowered before your death.
The proposed regulations use the following example to describe the issue and the solution: If an unmarried individual made post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025, when the basic exclusion amount is $5 million, the special rule would allow the applicable credit amount against estate tax to be based on a basic exclusion amount of $9 million. The result is that by making gifts which fully utilize the donor’s gift exclusion during the donor’s lifetime, approximately $5 million of assets will avoid gift and estate tax liability that would have been subject to estate taxes if the gifts had not been made.
An Estate Planning Attorney Can Help
We will continue to monitor the progress of the proposed regulations and provide updates as they become available. If you have questions or concerns about your estate plan in light of the Tax Cuts and Jobs Act provisions pertaining to estate and gift taxes, trusted legal advice and guidance from an experienced estate planning attorney can help. Contact the trust and estate planning attorneys at Magee & Adler. Call us today at 562-432-1001 to schedule an appointment.