IRS Addresses Clawback Concerns Under TCJA in Estate Planning

In 2017, the Tax Cuts and Jobs Act (TCJA), raised the basic estate tax exclusion amount from $5M to $10M (as adjusted for inflation) for individuals dying and gifts made after December 31, 2017, and before December 1, 2026.

Commencing January 1, the Federal estate and gift tax exclusions for 2020 increased to $11.58M. Pursuant to the terms of TCJA, and barring any further Congressional action, the gift and estate tax exclusions are scheduled to sunset to pre-2018 amounts on January 1, 2026. While these historically high exclusions increase opportunities for more effective estate planning, concerns have persisted that those availing themselves of the increased exemptions could face a clawback of benefits by the IRS against an estate by a decedent’s post-sunset death. Because there are no clear guidelines under TCJA, the possibility that the value of transfers made pre-sunset might be called back into the decedent’s estate if the decedent’s lifetime gifts exceed the effective estate tax exemption on the decedent’s date of death has loomed.

The recent IRS regulations now resolve this clawback scenario. Through Treasury Decision 9884, the IRS released final regulations addressing gifts made after 2017 and the estates of individuals dying after 2025. The regulations, which have been effective since November 26, 2019, now alleviate concerns of the clawback scenario posed by the TCJA.

Protection from a clawback is found in the final regulations’ special rule for computing the estate tax credit. The computation now permits use of the greater of (a) the basic exclusion amount applicable to gifts made during life or (b) basic exclusion amount applicable as of the date of death. The effect is that a decedent’s estate would not be unfairly taxed on gifts that were shielded from tax during the period of the increased exclusions.

The adoption of the regulations quells any concerns about the use of the lifetime gift exemption in effectuating a comprehensive estate plan, allowing taxpayers to confidently consider wealth transfer during life in the face of fluctuating federal estate tax exemptions.

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01.06.2020  |  PUBLICATION: Other Publications  | 

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