As we will see shortly, it is often “better to give than to receive,”[i] though this statement begs the obvious question[ii] of whether it is better to do so during one’s lifetime or upon one’s death.
Many well-to-do individuals are seriously deliberating this question[iii] as they contemplate the impending federal elections and consider how the outcome of these contests may influence their plans for the disposition of various assets, including the transfer of such assets, or the value they represent, among members of such individuals’ families.
Although this question is one that wealthy individuals have almost always had to confront, the potential consequences of any decisions reached over the next few months may be especially significant for some high-net-worth individuals, depending upon the interplay of certain factors.
Expiring Tax Benefits
For one thing, the upcoming elections coincide, if you will, with the expiration, at the end of 2025, of certain tax benefits enacted in 2017 as part of the Tax Cuts and Jobs Act (the “TCJA”).[iv] Among the expiring provisions relevant to this post are the following:
- the “enhanced” basic exclusion amount (“BEA”)[v] under the federal gift and estate taxes:
(i) in 2017, the aggregate amount of wealth that a U.S. individual could pass without incurring these taxes was $5.49 million;
(ii) in 2018, this amount was increased to $11.18 million;
(iii) this year, 2024, the amount is set at $13.61 million; it is projected to increase to $13.99 million for 2025;
(iv) assuming the enhanced exemption expires as scheduled, the 2026 BEA will be approximately $7 million; and
- the reduced top marginal income tax rate for individuals:
(i) prior to 2018, this rate was set at 39.6%; it applied to married individuals filing jointly with taxable income in excess of $470,700;
(ii) in 2018, the top rate was reduced to 37%; it applied to married individuals filing jointly with taxable income in excess of $600,000;
(iii) this year, 2024, the 37% rate applies to married individuals filing jointly with taxable income in excess of $731,200; in 2025, the 37% rate bracket is projected to begin at $751,600 of taxable income for a married couple filing jointly;
(iv) in 2026, the top rate will revert to 39.6%; although we do not yet know the bracket to which this rate will apply, it should be lower than the 2025 figure.
These and other provisions of the TCJA will expire as scheduled if any of the following scenarios materializes:
(a) each Party wins only one Chamber of Congress;[vi]
(b) one Party takes the White House while the other Party controls a non-veto-proof[vii] Congress; and
(c) a clean sweep of the executive and legislative branches by the Democrats.[viii]
Coming Down the Pike?
Speaking of which, in the case of a clean sweep, the Harris, Sanders, Wyden, Warren, AOC et al, “axis of taxes” may very well pursue the enactment of some version of the legislative tax agenda that, but for Senators Manchin and Sinema,[ix] came awfully close to being enacted at the end of 2021, and which has reappeared in revised iterations as part of the Administration’s budget proposals since then.
For those who may have forgotten, the Administration’s proposed budget[x] for the FY 2025 included the following tax measures (among others):
- Annual exclusion – restrict the use of Crummey powers by replacing the per-donee annual exclusion[xi] (currently set at $18,000; projected at $19,000 for 2025) with a gift tax annual exclusion of $50,000 per donor;
- GST exemption – restrict the use of dynasty trusts by making the GST exemption applicable only to: (i) direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust; and (ii) taxable terminations occurring while any person described in (i) is a beneficiary of the trust; upon the expiration of this limit on the duration of the GST exemption, the trust’s inclusion ratio would be increased to one, thereby rendering no part of the trust exempt from GST tax;
- GRAT – require that the remainder interest in a GRAT,[xii] at the time the interest is created, have a minimum value for gift tax purposes equal to the greater of 25% of the value of the assets transferred to the GRAT or $500,000; prohibit any decrease in the annuity during the GRAT term; prohibit the grantor from acquiring in an exchange an asset held in the trust[xiii] without recognizing gain or loss for income tax purposes; require that a GRAT have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years;
- Sale to grantor trust – treat the transfer of an asset for consideration between an irrevocable grantor trust and its deemed owner as one that is regarded for income tax purposes, which would result in the seller recognizing gain on any appreciation in the transferred asset and the basis of the transferred asset in the hands of the buyer being the amount the buyer paid to the seller;[xiv] and
- Valuation discount – restrict valuation discounts for gift and estate tax purposes by providing that the value of a partial interest in closely held property (real or personal, tangible or intangible; other than an interest in a trade or business) transferred to or for the benefit of a family member of the transferor would be the interest’s pro-rata share of the collective fair market value (“FMV”) of all interests in that property held by the transferor and the transferor’s family members, with that collective FMV being determined as if held by a sole individual.[xv]
Basic Concepts
An individual business owner who determines that their estate will likely be subject to the federal estate tax if they passed away after the BEA reverts to its pre-2018 base amount (adjusted for inflation), or who realizes that it may be difficult to avoid a taxable gift for transfers made after 2025, may want to consider making taxable gifts to their family, or to trusts for their benefit, before 2026.[xvi]
No Claw-Back
The IRS has clarified that individuals who take advantage of the increased BEA by making gifts during the period 2018 to 2025 will not be adversely impacted after 2025 when the BEA returns to pre-2018 levels. Specifically, regulations provide a special rule that effectively allows the deceased grantor’s estate to compute its estate tax credit using the greater of the BEA applicable to gifts made by the decedent during their life, or the BEA applicable on the date of death. As a result, an individual planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level after it decreases.[xvii] Of course, this benefit will not be available if the individual does not make taxable gifts before 2026 that utilize the increased BEA; in that case, the temporarily “enhanced” portion of the BEA will be lost.[xviii]
For example, assume that A never made a taxable gift before 2018. In 2018, when the BEA was $11.18 million, A made a taxable gift of $9 million. A used $9 million of the available BEA to reduce the gift tax to zero. A dies in 2026. Even if the BEA is lower that year, A’s estate can still base its estate tax calculation on the higher $9 million of BEA that was used in 2018.[xix]
Portability
What if A was married and predeceased their spouse, having died before 2026 without having made any taxable gifts from 2018 through the date of death? In other words, without having used any of the increased BEA?
In general, the executor of the deceased spouse’s estate may elect to transfer the deceased spouse’s unused exclusion (“DSUE”) amount to the surviving spouse.[xx] The DSUE amount is the lesser of (a) the BEA in effect on the date of death of the predeceased spouse, or (b) the predeceased spouse’s AEA less the sum of the decedent’s taxable estate and adjusted taxable gifts.[xxi] The surviving spouse to whom the DSUE amount is transferred may apply it to a lifetime gift made by the surviving spouse or to a transfer of property at their death.
The IRS has confirmed that the reference to the BEA in the definition of DSUE is to the BEA in effect at the time of the predeceased spouse’s death, rather than the BEA in effect at the death of the surviving spouse.[xxii] A DSUE election made on the deceased spouse’s estate tax return allows the surviving spouse to take into account the deceased spouse’s DSUE amount as part of the surviving spouse’s AEA.[xxiii] A decrease in the BEA after 2025 will reduce the surviving spouse’s AEA only to the extent that it is based upon the BEA, but not to the extent that it is based on the DSUE amount. Thus, the sunset of the increased BEA should have no impact on the existing DSUE rules – if a spouse dies during the increased BEA period, and the deceased spouse’s executor makes the portability election, the surviving spouse’s AEA includes the full amount of the DSUE that is based on the deceased spouse’s increased BEA. This DSUE amount is available to offset the surviving spouse’s transfer tax liability regardless of whether the transfers are made during or after the increased BEA period.[xxiv]
Basis, Holding Period
At Death. The basis of property in the hands of an individual who acquired the property from a decedent or to whom the property passed from a decedent is the FMV of the property at the date of the decedent’s death; i.e., the value placed upon such property for purposes of the decedent’s federal estate tax.[xxv] If such property is sold or otherwise disposed of by such individual within 1 year after the decedent’s death, then such individual is considered to have held such property for more than 1 year.[xxvi]
By Gift. In the case of property acquired by gift (whether by a transfer in trust or otherwise), the basis of the property in the hands of the recipient, for the purpose of determining gain, is the same as it was in the hands of the donor.[xxvii] In general, the recipient’s holding period for the gifted property includes the period for which the grantor held such property.[xxviii]
Part-Sale, Part-Gift. If the property secures the transferor’s debt to a lender, and Beneficiary assumes such debt or takes the property subject to such debt, the transfer of such property will be treated as a part-sale, part-gift. The amount of the debt is treated as an amount realized for purposes of determining whether there is a sale or exchange.[xxix]
Where Taxpayer’s transfer of property is in part a sale and in part a gift, Taxpayer has gain to the extent that the amount realized exceeds his adjusted basis in the property.[xxx]
Illustrative Scenarios
The following simplistic examples apply the foregoing principles to illustrate the federal estate tax benefit realized by the estate of a U.S. individual (“Taxpayer”) who utilized the increased BEA to make gifts of different types of property to Beneficiary prior to 2026,[xxxi] and the estate tax benefit lost by such an individual who fails, or chooses not, to make such gifts.[xxxii]
The examples also consider certain federal income tax consequences attributable to the gift of the property, as compared to its transfer at the death of Taxpayer.[xxxiii] To some extent, the lost income tax benefits associated with the gift of property balances out the estate tax gains. Likewise, when gifts are not made, the estate tax benefits lost are offset somewhat by the income tax benefit arising from the inclusion of the property in Taxpayer’s gross estate.
Cash
Pre-2026 Gift. Taxpayer never made a taxable gift before 2024. He has $20 million of cash that he keeps uninvested, in several banks.
In 2024, when the “enhanced” BEA is $13.61 million, Taxpayer makes a taxable gift of $13 million to Beneficiary. Taxpayer uses $13 million of the available BEA to reduce the gift tax to zero.
Taxpayer dies in 2026, when the BEA is projected to be $7 million. Even though the BEA is lower at the date of death than in the year in which the taxable gift was made (2024), Taxpayer’s estate can still base its estate tax calculation on the higher $13 million of BEA that was used in 2024. Thus, assuming the sum of the taxable estate ($7 million) plus adjusted taxable gifts is $20 million, and assuming a federal estate tax rate of 40%, Taxpayer’s federal estate tax liability will be [$20 million minus $13 million] x 40% = $2.8 million. That means Beneficiary will have received $17.2 million after estate tax.
No Gift. However, if Taxpayer makes no taxable gifts during the 2018 to 2025 period, then dies in 2026, Taxpayer’s estate will base its estate tax calculation on the 2026 BEA, which is projected to be $7 million. In that case, Taxpayer’s federal estate tax liability will be [$20 million minus $7 million] x 40% = $5.2 million. Beneficiary ends up with $14.8 million after estate tax.
Thus, by making a gift of cash that utilizes the enhanced BEA, Taxpayer’s estate will have saved $2.4 million of estate tax.
Non-Depreciable Property
Alternatively, assume Taxpayer owns non-depreciable properties with zero basis and an aggregate FMV of $20 million. Assume Taxpayer’s holding period is more than 1 year (long-term).[xxxiv] Assume also that the properties do not appreciate in value.
As we’ll see below, the gift of property not only removes the property from the grantor’s future gross estate; it also removes the appreciation in value of such property from the time of the gift to the date of the grantor’s death – the amount that would have been included in the gross estate had the gift not been made.
Pre-2026 Gift. In 2024, Taxpayer makes a gift of $13 million worth of property to Beneficiary, and retains $7 million worth of other property (which will pass to Beneficiary on Taxpayer’s death). Taxpayer uses $13 million of the available BEA to reduce the gift tax to zero.
At Taxpayer’s death in 2026, his taxable estate is $7 million and his adjusted taxable gifts are $13 million. His estate owes federal estate tax of [$20 million minus $13 million] x 40% = $2.8 million.
Beneficiary ends up with the gifted property, worth $13 million and with a basis of $0, along with the property he received at Taxpayer’s death, worth $7 million and with a stepped-up basis of $7 million.
Sale. After Taxpayer’s death, Beneficiary sells all the properties he received from Taxpayer to unrelated persons in exchange for cash. Beneficiary does not realize any gain on the sale of the $7 million property, for which he had a stepped-up basis.
However, Beneficiary recognizes $13 million of gain on the sale of the gifted property, for which he had $0 basis. Applying the long-term capital gain rate of 20%, plus the 3.8% surtax on net investment income.[xxxv] Beneficiary pays combined federal income tax and surtax on the sale of $3.094 million. He uses another $2.8 million of the sale proceeds to pay the estate tax owed by Taxpayer’s estate.
Beneficiary is left with $14.106 million after federal estate and income taxes.[xxxvi]
No Gift. If Taxpayer makes no gifts then, following his death in 2026, his estate will owe federal estate tax of [$20 million minus $7 million] x 40% = $5.2 million.
Thus, by not making a gift that utilizes the enhanced BEA, Taxpayer’s estate owes additional estate tax of $2.4 million.[xxxvii]
Because the properties passed to Beneficiary from Taxpayer’s estate, Beneficiary takes the properties with a stepped-up basis equal to their FMV, or $20 million.
Sale. When Beneficiary sells the properties for $20 million shortly after Taxpayer’s death, no gain is realized and, so, no income tax is due.
Beneficiary applies $5.2 million of the sale proceeds toward payment of the estate tax, which leaves Beneficiary with $14.8 million after taxes.
Non-Depreciable Appreciating Property
Pre-2026 Gift. Taxpayer owns two properties, Prop A and Prop B, worth $13 million and $7 million, respectively, and each with a basis of $0.
In 2024, Taxpayer makes a gift of Prop A to Beneficiary (while retaining Prop B) and uses $13 million of the available BEA to reduce the gift tax to zero. Prop A (but not Prop B) appreciates by 10% between the time of the gift and Taxpayer’s death in 2026.
At Taxpayer’s death, Prop A is worth $14.3 million and Prop B is still worth $7 million. The estate tax is [$20 million[xxxviii] minus $13 million] x 40% = $2.8 million.
Beneficiary ends up with $14.3 million (Prop A) plus $4.2 million (Prop B) = $18.5 million.
However, Taxpayer holds Prop A with the same adjusted basis as it had in Taxpayer’s hands at the time of the gift – $0; he takes Prop B with a basis equal to its FMV at the date of Taxpayer’s death – $7 million.
Sale. Beneficiary sells Prop A at a gain of $14.3 million; Beneficiary recognizes no gain on the sale of Prop B. Applying the combined long-term capital gain rate plus the surtax on net investment income – 20% plus 3.8% – yields a tax of $3.403 million.
Beneficiary applies $2.8 million of the sale proceeds to satisfy the estate tax. After these expenditures, Beneficiary is left with $15.097 million.[xxxix]
No Gift. If Taxpayer makes no gifts before his death in 2026, his estate tax is [$21.3 million minus $7 million] x 40% = $5.72 million.
Beneficiary ends up with Prop A and Prop B, with a stepped-up basis of $14.3 million and $7 million, respectively.
Sale. Beneficiary sells the two properties for $21.3 million in total; no gain is realized, so no income tax is owed.
Beneficiary applies some of the sale proceeds to satisfy the estate tax of $5.72 million, which leaves him with $15.58 million.
Thus, by making a gift that utilizes the enhanced BEA, Taxpayer will have passed $18.5 million to Beneficiary at an estate tax cost of $2.8 million. By retaining the two properties until his death, Taxpayer will have passed $15.58 million to Beneficiary at an estate tax cost of $5.72 million.
However, the income tax generated on the subsequent sale of the two properties offsets some of this advantage, at least on these facts, such that Beneficiary ends up with $15.077 million in the gift-followed-by-sale scenario, and $15.58 million in the no-gift-followed-by-sale scenario.
Depreciable Property
Pre-2026 Gift. Taxpayer owns depreciable residential rental real property with a FMV of $13 million and zero basis (i.e., fully depreciated). Taxpayers gifts the property to Beneficiary and uses $13 million of the available BEA to reduce the gift tax to zero.
Cost recovery. Beneficiary takes the property with the same $0 basis as Taxpayer. Thus, Taxpayer cannot claim depreciation deductions to offset the rental income derived from the property.
When Taxpayer dies in 2026, his estate will not owe any federal estate tax.
Sale. If Beneficiary sells theproperty for $13 million, he will recognize $13 million of gain. The rate of 25% will apply to the amount of straight-line depreciation previously allowed with respect to the property (the “unrecaptured depreciation”).[xl] If any component parts of the real property have been depreciated on an accelerated basis,[xli] the amount of such depreciation “recapture” will be taxed at the federal rate for ordinary income, which is scheduled to increase from 37% to 39.6% in 2026. The amount of gain in excess of the unrecaptured depreciation will be taxed as long-term capital gain at the rate of 20%. The entire gain from the sale may also be subject to the 3.8% surtax on net investment income.[xlii]
No Gift. If Taxpayer still owns the property when he dies in 2026, estate tax will be owing based on the then-reduced BEA of $7 million; specifically [$13 million minus $7 million] x 40% = $2.4 million.
Beneficiary will take the property with a basis equal to the property’s FMV at Taxpayer’s date of death, or $13 million. If Beneficiary decides to sell the property, he will not realize any gain from the sale.
After paying the estate tax, Beneficiary is left with $10.6 million.
Alternatively, Beneficiary may retain and operate the property. Because the property is residential rental property, Beneficiary may recover the property’s stepped-up basis under the straight-line method over a recover period of 27.5 years.[xliii] Assuming an annual depreciation deduction of approximately $473,000,[xliv] annual tax savings of $205,000,[xlv] and an 8% discount rate, the tax savings has a present value of about $2.8 million.
Direction?
Where does one go from here? Good question.
Planning for the tax efficient disposition of one’s estate is no easy matter even when the state of the tax laws is not in flux and taxpayers may safely rely upon their stability or continuity.
There is no single formula or plan that, if implemented, would address the concerns of every taxpayer. There are only general principles of which a taxpayer should be aware and some basic tools with which they should be familiar. The plan that is ultimately adopted for a particular taxpayer will depend upon many unique, more taxpayer-specific, factors than the basic economic factors described above.
Unfortunately for taxpayers, the state of the tax laws today is anything but stable. Individual taxpayers are reviewing the potential tax and economic consequences that may arise from the implementation of alternative plans in two very different estate and gift tax environments: the first, espoused by former Pres. Trump, would preserve and extend the benefits bestowed by the TCJA; the other, supported by Veep Harris, would allow the TCJA benefits to lapse and, although not clearly articulated on the campaign trail, is also likely to include some of the proposals from the FY 2025 Budget, described earlier.
It’s probably safe to say that some folks, as well as their advisors, will wait for the election results, next month, before deciding upon and carrying out a plan.
Stay tuned.
[i] Apologies for taking this statement out of context and using it to illustrate some of the tax considerations relating to the transfer of wealth among the members of a wealthy family.
In context, Paul in Ephesus: “In everything I did, I showed you that by this kind of hard work we must help the weak, remembering the words the Lord Jesus himself said: ‘It is more blessed to give than to receive'”. Acts 20:35.
See also Proverbs 19:17: “Whoever is generous to the poor lends to the Lord, and he will repay him for his deed.”
[ii] To a tax adviser, anyway.
[iii] Hopefully, with the assistance of their tax and other advisers, not to mention with members of their family.
For purposes of this post, I am assuming the individual in question and their spouse are U.S. citizens who reside in the U,S.
[iv] Pub. L. 115-97.
[v] As everyone knows by now, the 2017 Tax Cuts and Jobs Act (Pub. L. 115-97) doubled the basic exclusion amount – IRC Sec. 2010(c)(3)(C) – effective for gifts and deaths occurring after 2017. The enhanced exclusion amount disappears after 2025, at which point it will revert to the pre-TCJA basic exclusion amount adjusted for inflation through 2025. The exemption amount for 2025 is projected to be $13.99 million, an increase of $380,000 over 2024.
[vi] In which case whoever wins the White House will basically be a lame duck.
Notwithstanding such status, in the past such a White House could still use its control of the Treasury and IRS to “regulate” legislation into existence.
However, following the Supreme Court’s decision to overturn the “Chevron Doctrine” just a few months ago, the White House may be less willing to push the proverbial envelope. Loper Bright Enterprises v. Raimondo, No. 22–451, 603 U.S. __ (2024).
[vii] Congress can override a veto by passing an act by a two-thirds vote in both the House and the Senate. U.S. Constitution, Article I, Section 7, clause 2.
[viii] Is it possible for the GOP to win the Presidency, obtain a Senate majority, and maintain its majority in the House? If you get your news exclusively from the mainstream media, you are likely to conclude that a GOP sweep is not in the cards. If you get your news elsewhere, you may believe we’re heading toward a Reagan-like landslide. If you seek out different perspectives, you will not dismiss the possibility of a GOP sweep.
[ix] Neither of whom will be in the next Congress.
[x] https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf .
[xi] IRC Sec. 2503(b).
[xii] IRC Sec. 2702.
[xiii] Relying upon IRC Sec. 675(4).
[xiv] Also as to grantor trusts: provide that the grantor’s payment of the income tax on the income of an irrevocable grantor trust is a gift.
[xv] In applying this rule to an interest in a trade or business, segregate assets not actively used in the conduct of the trade or business and value them separately from the trade or business, and thus not discounting their value as part of the interest in the trade or business.
Other proposed changes included:
- limit the deferral of gain up to an aggregate amount of $500,000 for each individual taxpayer each year for real property exchanges that are like-kind; any gains from like-kind exchanges in excess of $500,000 in a year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange;
- any measured gain on the sale of improved real property held for more than one year would be treated as ordinary income to the extent of the cumulative depreciation deductions taken (i.e., not limited to the excess of such deductions over straight-line depreciation);
- increase the tax rate for long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million from 20% to 39.6%;
- require the donor or deceased owner of an appreciated asset to recognize as capital gain an amount equal to the excess of (i) the asset’s FMV on the date of the gift or the decedent’s date of death, over (ii) the donor’s or decedent’s basis in that asset on the date of transfer;
- impose a minimum tax of 25% on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) greater than $100 million;
- ensure that all pass-through business income[xv] is subject to either the net investment income tax[xv] or SECA;
- increase the Medicare tax rate to 5% for taxpayers with more than $400,000 in earnings;
- increase the surtax on net investment income to 5% for taxpayers with more than $400,000 in income;
- raise the corporate income tax rate from 21% to 28%;
- extend the IRC Sec. 162(m) deduction disallowance rule to compensation in excess of $1 million to any employee of a closely held C corporation.
As a candidate on the 2020 campaign trail, then-Senator Harris endorsed, among other things: an increase of the corporate tax rate to 35%; the imposition of a 4% “income-based premium” on households making more than $100,000 annually (to pay for her “Medicare for All” program); and the imposition of a financial transactions tax on stock and bond trades, and on derivative transactions.
[xvi] I am assuming that, even with a clean sweep by the Democrats, the sunset of the enhanced BEA would not be accelerated.
[xvii] There is no claw back that would result in the imposition of gift or estate tax as a result of the gift that was covered by the increased BEA in effect at the time the gift was made. See. Examples 1 and 2 of Reg. Sec. 20.2010-1(c)(2).
[xviii] More accurately, if the individual does not make taxable gifts in excess of the BEA in effect at the time of their death.
Individual A (never married) made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative total of $11.4 million in basic exclusion amount allowable on the dates of the gifts. The basic exclusion amount on A’s date of death is $6.8 million. Because the total of the amounts allowable as a credit in computing the gift tax payable on A’s post-1976 gifts (based on the $9 million of BEA used to determine those credits) exceeds the credit based on the $6.8 million BEA allowable on A’s date of death, credit for purposes of computing A’s estate tax is based on a BEA of $9 million, the amount used to determine the credits allowable in computing the gift tax payable on A’s post-1976 gifts.
However, if A made cumulative post-1976 taxable gifts of $4 million, then the total of the amounts allowable as a credit in computing the gift tax payable on A’s post-1976 gifts would be less than the credit based on the $6.8 million BEA allowable on A’s date of death. The credit to be applied for purposes of computing A’s estate tax would be based on the $6.8 million BEA as of A’s date of death. Reg. Sec. 20.2010-1(c).
[xix] In general, the federal gift tax and estate tax provisions apply a unified rate schedule to a person’s cumulative taxable gifts and taxable estate to arrive at a net tentative tax. Any tax due is determined after applying a credit based on an applicable exclusion amount. A key component of this exclusion is the BEA. The credit is first applied against the gift tax, as taxable gifts are made. To the extent that any credit remains at death, it is applied against the estate tax.
Thus, in computing the federal estate tax, the decedent’s taxable gifts (after 1976) are added to the amount of the decedent’s taxable estate. IRC Sec. 2001(b); Reg. Sec. 20.2010-1(c).
[xx] This amount is said to be portable.
[xxi] Amounts on which gift taxes were paid are excluded from adjusted taxable gifts for the purpose of this computation.
[xxii] Thus, even if the amount of BEA that is allowable under IRC Sec. 2010(c)(3) decreases after 2025, a DSUE amount elected during the increased BEA period will not be reduced as a result of the sunset of the increased BEA. IRC Sec. 2010(c)(4) defines the DSUE amount as the lesser of the BEA or the unused portion of the deceased spouse’s “applicable exclusion amount” (AEA) at death. AEA is the sum of the DSUE amount and the BEA. Section 2010(c)(2). See Reg. Sec. 20.2010-1(c)(2), Examples 3 and 4.
[xxiii] IRC Sec. 2010(c)(5); Reg. Sec. 20.2010-2(a).
[xxiv] Individual B’s predeceased spouse, C, died before 2026, at a time when the BEA was $11.4 million. C had made no taxable gifts and had no taxable estate. C’s executor elected to allow B to take into account C’s $11.4 million DSUE amount. B made no taxable gifts and did not remarry. The BEA on B’s date of death is $6.8 million. Because the total of the amounts allowable as a credit in computing the gift tax payable on B’s post-1976 gifts attributable to the BEA (zero) is less than the credit based on the BEA allowable on B’s date of death, the credit to be applied for purposes of computing B’s estate tax is based on B’s $18.2 million applicable exclusion amount, consisting of the $6.8 million BEA on B’s date of death plus the $11.4 million DSUE amount.
Alternatively, after C’s death and before 2026, B makes taxable gifts of $14 million in a year when the BEA is $12 million. B is considered to apply the DSUE amount to the gifts before applying B’s BEA. The amount allowable as a credit in computing the gift tax payable on B’s post-1976 gifts for that year ($5,545,800) is the tax on $14 million, consisting of $11.4 million in DSUE amount and $2.6 million in BEA. This BEA is 18.6 percent of the $14 million exclusion amount allocable to those gifts, with the result that $1,031,519 (0.186 × $5,545,800) of the amount allowable as a credit for that year in computing gift tax payable is based solely on the BEA. The amount allowable as a credit based solely on the BEA for purposes of computing B’s estate tax ($2,665,800) is the tax on the $6.8 million basic exclusion amount on B’s date of death. Because the portion of the credit allowable in computing the gift tax payable on B’s post-1976 gifts based solely on the BEA ($1,031,519) is less than the credit based solely on the BEA ($2,665,800) allowable on B’s date of death, the credit to be applied for purposes of computing B’s estate tax is based on B’s $18.2 million applicable exclusion amount, consisting of the $6.8 million BEA on B’s date of death plus the $11.4 million DSUE amount.
[xxv] IRC Sec. 1014; Reg. Sec. 1014-1.
[xxvi] IRC Sec. 1223(9).
[xxvii] IRC Sec. 1015; Reg. Sec. 1.1015-1.
The same rule applies in determining loss unless the basis is greater than the FMV of the property at the time of the gift, in which case, the basis for determining loss is the FMV at the time of the gift.
[xxviii] IRC Sec. 1223(2).
[xxix] Reg. Sec. 1.1001-2. For purposes of this post, we’re assuming that none of the properties in question are encumbered with debt.
[xxx] The basis is not allocated between the gift and sale portions, as in the case of a charitable contribution of such property. Reg. Sec. 1.1001-1(e)(1); Reg. 1.1011-2(a)(1).
The following should be noted: if the property gifted is an installment obligation payable to Taxpayer – i.e., the debt represents seller financing for the sale of property by Taxpayer to a buyer – Taxpayer’s transfer of the obligation by gift will accelerate Taxpayer’s recognition of the gain yet to be recognized. IRC Sec. 453B.
[xxxi] The year in which the BEA reverts to its pre-2018 level, adjusted for inflation through 2025.
[xxxii] From an economic perspective, a gift of a property deprives the grantor of (a) the continued unrestricted use of the property, (b) the ability to withdraw equity from the property, (c) the use of the income generated by the property, and (d) the ability to secure a loan with the property. In each case, it is assumed the asset gifted is disposable as to the Taxpayer.
[xxxiii] For purposes of this post, we’re ignoring state income and estate taxes.
[xxxiv] IRC Sec. 1222(3).
[xxxv] IRC Sec. 1(h) and Sec. 1411. For purposes of this post, we’re assuming no rate changes by the next Congress (the 119th).
[xxxvi] $13 million less $2.8 million minus $3.094 million plus $7 million.
[xxxvii] $5.2 million minus $2.8 million = $2.4 million.
[xxxviii] Taxable estate of $7 million plus adjusted taxable gifts of $13 million.
[xxxix] $21.3 million minus $2.8 million minus $3.403 million.
[xl] IRC Sec. 1(h)(1)(E).
[xli] Say, as a result of a cost segregation study commissioned by Taxpayer.
[xlii] IRC Sec. 1411. Unless, on our facts, Beneficiary can demonstrate he is a real estate professional within the meaning of IRC Sec. 469(c)(7).
[xliii] IRC Sec. 168(b)(3) and Sec. 168(c).
[xliv] $13 million divided by 27.5 years.
[xlv] Based on a federal rate of 39.6% plus 3.8%, or 43.4%.
