To resolve concerns that arose over the calculation of gift taxes, the IRS recently issued proposed regulations that would allow estates to leverage favorable gift exclusion amounts from the Tax Cuts and Jobs Act that are set to expire on Dec. 31, 2025.

Prior to Jan. 1, 2018, for estates of decedents dying and gifts made beginning in 2011, Internal Revenue Code Section 2010(c)(3) provided for a basic exclusion amount of $5 million, indexed for inflation after 2011. This credit is applied first against the gift tax, on a cumulative basis, as taxable gifts are made. To the extent that any credit remains at death, it is applied against the estate tax. This amount had reached approximately $5.4 million for estates of decedents dying and gifts made on or prior to Dec. 31, 2017. 

The Tax Cuts and Jobs Act doubled the basic exclusion amount from $5 million to $10 million, to be increased for inflation. For the 2018 tax year, an individual has a basic exclusion amount of $11.18 million ($11.4 million for 2019). This increased exemption amount is set to return to its pre-2018 level of $5 million after Dec. 31, 2025.

Due to this doubling and subsequent sun-setting of the exclusion, a difficult situation may arise. Different exclusion amounts may apply at the time when a gift was made by an individual versus when the individual dies. This could cause problems calculating the available credit at the individual’s death, raising the concern of a “clawback” of gifts made during the years with the increased basic exclusion amount for estates of decedent’s dying after Dec. 31, 2025.

The IRS’s proposed regulations aim to address this conundrum by creating a special rule that allows an estate to apply the higher basic exclusion amount available at the time of the gift, rather than the exclusion amount that will be in effect after 2025 (at the time of the individual’s death).