In December 2017, the Tax Cuts and Jobs Act (TCJA) was passed and amended the Internal Revenue Code to increase the basic exclusion amount (BEA) from $5 million to $10 million (adjusted for inflation) on gifts made or estates of decedents dying after Dec. 31, 2017 and before Jan. 1, 2026. Starting Jan. 1, 2026, the BEA will revert back to $5 million. With the inflation adjustment, the BEA for each individual taxpayer is $11,400,000 in 2019.
Although the TCJA amendments provide huge benefits to taxpayers now, many became concerned about the effects of the amendments on taxpayers after 2025 when the BEA sunsets and reverts back to $5 million. Specifically, taxpayers needed clarification on the following questions:
- Could taxpayers who died after 2026 be retroactively denied the full benefit of the higher exclusion amount on gifts made after Dec. 31, 2017 and before Jan. 1, 2026?
- Could a deceased spousal unused exclusion (DSUE) amount elected during the increased BEA period be reduced as a result of the decrease in the BEA amount after 2025?
In response to these questions, the IRS released final regulations with revisions that give certainty to taxpayers when gifting under the higher BEA through 2025. Final regulations adopted a special rule that would ensure that the estate of a decedent is not inappropriately taxed with respect to gifts that were sheltered from gift tax by the increased BEA when made. To demonstrate this in an example:
- Individual A has never been married and 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. Individual A dies after 2025. The basic exclusion amount on A's date of death is $6.8 million.
- The credit to be applied for purposes of computing A's estate tax is based on a basic exclusion amount of $9 million, the amount used to determine the credits allowable in computing the gift tax payable on A's post-1976 gifts, as opposed to the $6.8 million basic exclusion amount allowable on A's date of death.
Further, the IRS provided the following example to demonstrate that the sunset of the increased BEA has no impact on the existing DSUE rules:
- Individual B's predeceased spouse, C, died before 2026, at a time when the basic exclusion amount was $11.4 million. C had made no taxable gifts and had no taxable estate. C's executor elected to allow B to consider C's $11.4 million DSUE amount.
- B made no taxable gifts and did not remarry. Individual B dies after 2025. The basic exclusion amount on B's date of death is $6.8 million.
- 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 basic exclusion amount on B's date of death plus the $11.4 million DSUE amount.
Now that the IRS has provided clarity and certainty when it comes to gifting under the higher BEA, taxpayers should consider looking into various tax planning opportunities related to the higher exclusion amounts available through 2025.