No Clawback on Tax Gift Amounts - G.R.O.W.T.H.

IRS Announces No Clawback on Tax Gift Amounts

On November 20, 2018 the IRS issued proposed regulations (expected to be passed) clarifying that the estate/gift tax will not apply to gifts made before 2026, when the amount that can be sheltered from the tax is higher, as provided for by the 2017 Tax Act.

Why does this matter? ‍

Because of the technicality in the way the estate tax is calculated. That is, the gifts made before 2026 would otherwise have to be included on the estate tax return filed at death, without an offset by the higher exemption amount that was available at the time the gift was actually made. The lower exemption amount available after 2025 would be required to be used on the estate tax return if death occurs in 2026 or later. Therefore, “Clawback” refers to bringing back into the estate tax calculation the gifts made when the exemption amounts were higher, and ‘unsheltering’ them when the exemption amount is lower. This would mean that the only way to benefit from the higher exemption amount is to both make the gifts and also die between 2018 and 2025. It’s a mere technicality--- that really, really matters.

A Summary of the Numbers

• The 2017 Tax Act increased the amount individuals and couples can transfer to heirs on a temporary basis. The combined estate/gift tax-free amount per individual and per couple in 2018 was $11,180,000 and $22,360,000, respectively. The IRS announced the updated inflation-adjusted amounts for 2019, which are $11,400,000 per individual, $22,800,000 per couple.
  
• The increased exemptions are due to expire in 2026, when the amounts revert back to their 2017 level of roughly $6,000,000+ per individual/$12,000,000+ per couple, subject to inflation adjustments.
• The IRS confirmed in its November 20, 2018 Revenue Procedure 2018-57 that this is a “Use It or Lose It” proposition. That is:
• If gifts are made before 2026, wealthy families with an estate valued at approximately $12 million per individual/$23M per couple or under, will not be subject to estate tax on gifts made up to this threshold — regardless of when death occurs.
  
• If gifts are made after 2025 by these same wealthy families, they will be subject to estate taxes on any gifts that exceed $6,000,000 per individual / $12,000,000 per couple, barring any further changes to tax law.
  
• The IRS also clarified that for purposes of computing the estate tax for decedents who made gifts prior to 2026-- when the exemption was higher-- but who die after 2025, those gifts sheltered by the higher exemption will not be brought back into the taxable estate just because death occurs when the exemption was lower. In other words, there is no “clawback” of the gifts.
  
• Notably, however, the IRS remains silent on what amount of exemption will be remaining after 2025 if only a partial amount of the higher exemption is used prior to 2026. That is, if the client made total gifts of only $10M (of the $11.4M available in 2019, for example), would the client still have $1.4M remaining to use of the $6M amount available after 2025? Or would the full $6M be available? Or would nothing be available?

The takeaway for wealthy families? Use it or lose it.