The Tax Cuts and Jobs Act enacted in 2017 increased the federal estate and gift tax exemption to $11.18 million per person, effective for the period of 2018 through the end of 2025. This same law provides that, starting in 2026, the gift and estate tax exemption will decrease to $5 million per person, plus inflation adjustments.
This temporary increase in the federal estate and gift tax exemptions raised the issue of what would happen if gifts were made before 2026 in amounts which exceeded the $5 million federal estate and gift tax exemption amount, should the donor die or make additional taxable gifts after 2025. The concern was that the “excess” gifts made before 2026 could be subjected to estate tax if the donor died after 2025 and the tax exemption had decreased. The 2017 Tax Act authorized the IRS to prescribe regulations to address this situation.
The general consensus among commentators and Congressional staffers had been that regulations would not allow a clawback of the “excess” gift and estate tax exemption used against taxable gifts made before 2026, should the donor then die or make additional gifts after 2025. The IRS has issued proposed regulations in November 2018 addressing the clawback issue. While the IRS has taken an unexpected and unorthodox technical approach to the issue, the ultimate result is that there will not be a clawback of “excess” gift and estate tax exemption used before 2026, if the donor makes additional gifts or dies after 2025.
The possibility that clawback might occur had been some deterrent to donors anxious to use their full new $11.18 million (now $11.4 million in 2019, due to an inflation adjustment) to make tax-free gifts of more than $5 million between now and 2026. These proposed regulations lay that concern to rest, thereby freeing donors to use their newly-increased gift and estate tax exemption before 2026. In fact, with this change, the sooner you make a large tax-free gift, the better off you are tax-wise. All the income and appreciation earned after the date of the gift will inure to the benefit of your donees, and be out of your own taxable estate. In addition, with the possibility of a change in the political parties in the White House and in Congress and Senate in 2020, there is additional incentive to make your large taxable gift before 2021.