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Friday, November 23, 2018


Similar to concerns in 2012 when there were concerns about a reduction in the unified credit, the 2026 sunset of the $5 million increase in the unified credit basic exclusion amount for gift and estate taxes under the 2017 Tax Cuts and Jobs Act (TCJA) has created concerns about what happens to taxpayers who use all or part of the $5 million increase in the period after the 2026 sunset. In a holiday gift to taxpayers, the Treasury Department has issued a notice of proposed rulemaking that should ameliorate most, if not all, concerns of clawback and related adverse impacts on gift and estate tax computations and amounts.

The Treasury Department announcement indicates four areas of concern. It then notes that three of these areas are nonissues under current law requiring no regulatory attention, and then provides proposed modifications to the regulations to address the fourth area.

First Area - If Pre-2018 Gift Tax Was Paid, Will Those Gifts Absorb Some or All of the 2018-2025 Available Increase in the Basic Exclusion Amount So As To Reduce the Amount of Credit Available for Offsetting Gift Taxes on Gifts Between 2018 and 2025 (i.e., applying the increase to prior gifts on which gift tax was paid)? The Treasury Department’s analysis is that this does not occur under current law, and no regulatory fix is thus needed to avoid such a reduction. Readers interested in the technical reasons why this is the case should review the notice - this posting will be long enough without covering those details (this also applies to the other 3 areas of concern below).

Second Area - The Same as Area One, But as to Estate Taxes on Persons Dying Between 2018 and 2025? The same conclusion here - pre-2018 gift taxes do not act to reduce the Basic Exclusion Amount increase available for estate tax purposes between 2018 and 2015, without the need for a regulatory fix.

Third Area - Will Gift Tax on Gifts Made After 2025 Be Increased By Including in the Tax Computation a Tax on Gifts Made Between 2018 and 2025 that Were Sheltered When Made by the Increase in the Basic Exclusion Amount? The Treasury Department’s analysis is that this does not occur under current law, and no regulatory fix is thus needed to avoid such a threated result.

Fourth Area -  Will Gifts Made Between 2018 and 2025 that are Sheltered by the Increased Basic Exclusion Amount Be Subject to Estate Tax for Decedents Dying in 2026 and After When the Increase Disappears? Treasury determined that this increase in estate tax will occur under current law. Deeming this to be inappropriate, new proposed regulations will amend Treas. Regs. §20.2010-1 to avoid this result. More particularly, the revisions will allow for a basic exclusion amount at death available to be applied against the hypothetical gift tax portion of the estate tax computation equal to the higher of (a) the otherwise applicable basic exclusion amount, and (b) the basic exclusion amount applied against prior gifts.

These new provisions should remove a cloud hovering over taxpayers that desire to use the increased exemption before it disappears in 2026. So the general planning advice to use those increases before 2026 before they are lost (if otherwise practical in a given taxpayer’s situation) remains in effect. At first reading, it would appear that if there is a political change in Washington D.C. that reduces the exemption before 2026, the new regulations would also cover that situation. Of course, if such a change was made, Congress could also write the change in a manner that revises the methods of computation so as to void the foregoing conclusions and changes or to create other problems.

Regarding questions whether Treasury has the authority to make these changes, the announcement points to Code §2001(g)(2) which was added in the TCJA and authorizes regulations in this area.

Of course, these regulations are only proposed, so cautious taxpayers may want to wait until they are actually adopted before relying on them.

It would have been nice if the announcement had also addressed the GST exemption and its temporary increase and 2026 rollback to confirm no adverse consequences from the rollback after it occurs.

REG-106706-18, Notice of Proposed Rulemaking

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