The Tax Cuts and Job Acts of 2017 made significant changes to the IRS tax code. While most people were looking at the reforms to the individual income tax, itemized deductions, childcare tax credit, and more, our job was to pay attention to the estate and gift tax exclusions.
The TCJA increased the estate and gift tax exclusion and generation-skipping transfer tax Exemption (the exemption) to $10 million from $5 million (adjusted for inflation) for decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026. On January 1st, 2026, the income, estate, gift, and GST tax changes are set to sunset. Therefore, starting on January 1, 2026, the Exemption will be 5 million (with adjustments for inflation).
Under IRS regulations made final in 2019, Individuals who gave away the exemption before 2026 would not be subject to additional estate, gift, or GST taxes when the exemption is reduced for tax years after 2025. Recently, the IRS proposed regulations that will provide exceptions to this 2019 regulation.
In 2019, the IRS issued final regulations which added a special rule that applies to situations in which the credit against estate tax attributable to the Exemption at the date of death is less than the sum of the credits attributable to the Exemption allowable in computing gift tax payable regarding the decedent’s lifetime gifts. The special rule prevents the estate of an individual who has given away their Exemption from being subject to estate tax on completed gifts that, because of the higher Exemption, were free of gift tax when made.
On April 27, the IRS issued proposed regulations that would limit the special rule to completed gifts. Under Proposed Regulation Section 20.2010-1(c)(3), these transfers that are includible in the gross estate would be excluded from the special rule:
The 2022 proposed regulations also clarify that even though the special rule is limited in some instances, it will continue to apply to these transfers:
We realize this is confusing and complex. Individuals who have used estate planning techniques involving gifts treated as testamentary transfers, such as individuals who have GRATs or QPRTs but who might not survive the set term of years or individuals who used a promissory note to give away their Exemption, should have their estate plan reviewed and possibly revise their planning.
While the fate of TCJA provisions scheduled to sunset in 2026 remains uncertain (many proposals in Congress in 2021 tried to accelerate the sunset of the TCJA), these recently proposed changes are likely to be finalized and should be considered meanwhile.
By Partner, Gary Altman, Esq.