Tax Insights

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What happens if my estate and gift tax exclusion reverts?

estate and gift tax exclusion, gift tax, estate, taxIf you have been following all the changes in the estate and gift tax exclusion amount over the past several years, you probably know that you can now give away – during your life, or on your death – $10,000,000 (adjusted for inflation) estate and gift tax free. The actual amount in 2019 is $11,400,000, or $22,800,000 for a married couple. This increase in the estate and gift tax exclusion is due to the Tax Cuts and Jobs Act (TCJA). But very much like the fairy godmother’s warning in the story of Cinderella, the exclusion amount is currently set to revert back to its previous amount of $5,000,000 (adjusted for inflation) at the stroke of midnight on December 31, 2025.

So, what does this mean if a person were to gift their full exemption amount of $11,400,000 in 2019 and die in 2026 when the exemption reverts back to $5,000,000? The question has been whether the increased exemption amount was on loan to the taxpayer or permanently gifted? If you made a gift of $11 million in 2019, and died in 2026 when the estate tax exemption reverts to $5 million, would you owe estate tax on that extra $6 million gift? Congress recognized the problem and gave the IRS authority in the TCJA to solve this administratively.

Maximize your gifting strategies under tax reform

The estate tax return requires a computation of the tax paid or made payable during the decedent’s lifetime. This hypothetical calculation (tax payable on gifts made after 1976), could have resulted in a “clawback” of gifts made during the years when the temporary increase was applicable – retroactively taxing amounts exceeding the available credit based on the exclusion amount in the year of death. However, the Internal Revenue Service’s proposed regulations would eliminate this concern. The hearing on the proposed regulation will be held on March 13, 2019.

Many taxpayers will probably wait until late in 2025 to make any drastic decisions on gifting their entire exclusion amount. However, keep in mind that Congress can change the law at any time, particularly if Democrats take over the Presidency in 2020 or 2024, and the 2017 tax act is a political hotbed. The increased estate and gift tax exemption is important for avoiding the 40% gift and estate tax as well as the 40% generation-skipping transfer tax exemption. Based on current law, it’s a use it or lose it proposition, so be sure to contact your Henry+Horne estate planning professionals to discuss your options before the magic ends and your coach turns back into a pumpkin.

Pamela Wheeler, EA