The Tax Cuts and Jobs Act doubled the estate and gift tax exemption amount to $10 million* per person. This means that in 2019 a total of $11.4 million and in 2020 $11,580,000 can be transferred on death or by gift, free of federal estate and gift tax. For a married couple, the total amount is $22.8 million in 2019 and $23.2 million in 2020. But this bonus exemption amount is currently scheduled to revert to the previous amount of $5 million* after December 31, 2025, absent intervention by Congress.
The question among estate-planning professionals has been what will happen if you make a large gift during life and later die after 2025 when the estate exemption reverts to $5 million? The statutory sunset of the higher exemption and reversion to the lower amount could, in effect, retroactively deny taxpayers who die after 2025 the full benefit of the higher exclusion amount applied to previous gifts. This scenario has been referred to as a “clawback” of the applicable exclusion amount.
On Friday, November 22, 2019, the IRS issued the final “clawback” regulations (T.D. 9884) addressing the mathematical operation of the estate tax exemption after the scheduled “sunset” of the TCJA’s increased estate and gift tax exemptions. The final regulations largely adopt the proposed regulations issued on November 23, 2018, and include four examples which, among other things, illustrate the impact of the inflation adjustments.
The good news is that individuals planning to make large gifts before 2025 can do so without the concern they will lose the tax benefit of the higher exemption level once it decreases after 2025. This allows taxpayers and estates to apply the exemption that is in effect at the time a gift is made or a decedent dies. The IRS made it clear that if the taxpayer uses up their bonus exemption but dies in a year when the exemption is lower, gift amounts that were covered by the bonus exemption would not be clawed back into the estate.
*adjusted for inflation