Favorable Guidance Afforded Taxpayers Making Substantial Taxable Gifts

Article prepared by Tax Partner Chuck Schultz III and Tax Senior Manager John Gibbons

The Tax Cuts and Jobs Act enacted in December 2017 provided a profound benefit for those holding large estates; that is, the estate and gift tax exemption increased from $5.49 million per individual in 2017 to $11.18 million in 2018 (increasing to $11.4 million in 2019). Many estate planners have been urging their wealthy clients to make large lifetime gifts using the additional exemption amount. However, this increased exemption is scheduled to expire at the end of 2025, after which the exemption is scheduled to revert to the lower $5.49 million amount, adjusted for inflation.

The concern expressed by many clients and planners was whether these gifts would later be added back to the taxpayer’s estate after the exemption amount reverted, a concept referred to as “clawback.” For example, if a taxpayer has made a $10 million gift in 2018 and passes away in 2026 after reversion, it was unclear whether the estate would owe estate tax on the difference between the $10 million of exemption used to make the 2018 gift and the lower exemption amount available in 2026.

The IRS has now issued proposed regulations (REG-106706-18) that assert that any gifts made using the higher exemption will remain fully tax exempt in the future, without regard to a possible reversion of the exemption to the lower amount. Thankfully, this provides guidance that taxpayers taking advantage of the higher exemption can likely do so without concern of a possible future clawback tax. A hearing has been scheduled on this rule on March 13, 2019, after which the regulations will be finalized.

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