In response to Internal Revenue Code Section 2001(g)(2), enacted as part of the 2017 Tax Act, in which the Secretary of the Treasury was directed to prescribe regulations to carry out IRC Section 2001(g) with respect to the difference between the basic exclusion amount applicable at the time of a decedent’s death and the basic exclusion amount applicable with respect to any gifts made by the decedent. On November 22, Treasury issued, and today published in the Federal Register, Treasury Regulation Section 20.2010-1(c).
Treasury Regulation Section 20.2010-1(c) ensures that, if a decedent uses the increased basic exclusion amount for gifts made while the 2017 Tax Act was in effect and dies after the sunset of the 2017 Tax Act (currently scheduled for January 1, 2026), such decedent won’t be treated, on such decedent’s estate tax return, as having made adjusted taxable gifts solely because the increase in the basic exclusion amount effectuated by the 2017 Tax Act was eliminated. Thus, many clients will now be encouraged to make large gifts within the enhanced gift and estate tax exemption presently in place – knowing that, if the exemption is lower when they die, those gifts will nevertheless be sheltered from estate tax.
How the New Regulation Works
The mechanism by which Treasury Regulation Section 20.2010-1(c) achieves this result is to provide that, if the total credits that were used in computing a decedent’s gift tax on post-1976 gifts, within the meaning of IRC Section 2001(b)(2), is greater than the applicable credit amount used, pursuant to IRC Section 2010(a), to compute the estate tax on the decedent’s estate, the credit that can in that circumstance be used to compute the estate tax is deemed to be the total credits that were used in computing the decedent’s gift tax.
DSUE Amount Applied to Gifts Remains Intact After Sunset
Treasury Regulation Section 20.2010-1(c) also explains how the deceased spousal unused exclusion (DSUE) amount interacts with the basic exclusion amount to produce the intended “no clawback” result. Treasury Regulation Section 20.2010-1(c)(1)(ii) and Example 4, taken together, make several important points clear:
- When a surviving spouse makes taxable gifts, any DSUE amount that was available to him or her is deemed to have been applied to those gifts before his or her basic exclusion amount was so applied.
- If that surviving spouse dies after the sunset of the 2017 Tax Act, the DSUE amount applied to those gifts is not reduced.
- If both the DSUE amount and the surviving spouse’s basic exclusion amount were applied to those gifts, in calculating the amount of the credit available in computing the surviving spouse’s estate tax, the undiminished DSUE amount is removed.
- The total credits that were used in computing the surviving spouse’s gift tax based on that intact DSUE amount, plus the credit determined by applying the general “no clawback” rule of Treasury Regulation Section 20.2010-1(c), are available to offset the surviving spouse’s estate tax liability
While it took a year to bring this relatively small regulatory project to a conclusion, it is a welcome development. The Internal Revenue Service’s treatment of the DSUE amount in the “no clawback” context is good news. It is somewhat disappointing that the IRS declined to address whether GST exemption allocated before sunset of the 2017 Tax Act would, like the basic exclusion amount and the DSUE amount applied in computing the gift tax on post-1976 gifts, remain in place without reduction. It seems significant though that, in the preamble, after observing that the GST exemption amount is defined by reference to the basic exclusion amount, the IRS stated: “There is nothing in the statute that would indicate that the sunset of the increased [basic exclusion amount] would have any impact on allocations of the GST exemption available during the increased [basic exclusion amount] period.”