On November 22, 2019 the IRS announced that individuals taking advantage of the increased gift and estate tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.1

The announcement was issued as final regulations. It is designed to implement changes made to the gift and estate tax exemption by the 2017 Tax Cuts and Jobs Act (TCJA). One of those changes increased the gift and estate tax exclusion amount from $5 million up to $10 million, adjusted for inflation using the Chained Consumer Price Index for All Urban Consumers. As adjusted for inflation, the exclusion for 2019 increased to $11.4 million per person. The inflation-adjusted amount for 2020 is $11.58 million per person.

Under the final regulations, individuals who make large gifts while the increased gift tax exclusion is available can do so without concern that they will lose the tax benefit once the exclusion decreases after 2025.

Prior to the issuance of the proposed regulation in November 2018, practitioners were concerned about what would happen if a donor made a gift during the period of time between 2018 and 2025 when the increased gift tax exemption was available, and later, after 2025, the client died when the exemption decreased to pre-2018 levels.

Using a simplified example with rounded numbers, suppose a donor makes an $11 million gift during the 2018-2025 period when the gift tax exemption is, say, $11 million, and dies after 2025 when the gift and estate tax exemption reverts to $6 million. The calculation of the federal estate tax requires the decedent's estate to include the amount of lifetime gifts in his or her taxable estate for computation purposes.

If the decedent died after 2025 when the gift and estate tax exemption was reduced to $6 million, would the estate get credit for the $11 million exemption (the amount of the exemption available when the gift was made) or only $6 million (the amount of the exemption at the date of death)?

If the decedent's estate only got credit for the $6 million date of death exemption, his estate would be taxable on the $5 million difference (the $11 million exemption available at the date of the gift, less the $6 million exemption available at the date of death). If the estate only got credit for the $6 million exemption available at the date of death, the decedent would not get credit for the full $11 million exemption available at the date of the gift.

The final regulations put that concern to rest. The regulations adopt a special rule that allows the estate to compute its estate tax using either the basic exclusion amount applicable to gifts made during life or the basic exclusion amount applicable on the date of death, whichever is higher. This ensures that the estate of a decedent dying after 2025 is not inappropriately taxed with respect to gifts made during between 2018 to 2025. This is an extremely favorable result for taxpayers.

The final regulations also include examples illustrating how the deceased spousal unused exclusion (DSUE) amount is calculated. The final regulations confirm that the reference to “basic exclusion amount" in Section 2010(c)(4), defining the DSUE as the lesser of the basic exclusion amount or the unused portion of the spouse's applicable exclusion amount, refers to the basic exclusion amount in effect at the time of the deceased spouse's death, rather than the basic exclusion amount in effect when the surviving spouse dies. Thus, a DSUE amount elected during the increased basic exclusion amount period (2018 to 2025) will not be reduced when the increased basic exclusion amount sunsets after 2025. Example 3 of the final regulations illustrates this point.

The final regulations apply to estates of decedents dying after November 26, 2019, the date they are scheduled to be published in the Federal Register, but they may be applied to estates of decedents dying after December 31, 2017, and before November 26, 2019

As always, the professionals at BNY Mellon Wealth Management are available to discuss the ramifications of this final regulation on your estate planning objectives.

  • 1 TD 9884

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