On November 26, 2019, the Treasury Department and IRS released final regulations related to the Tax Cuts and Jobs Act’s (TCJA) temporary increase of the gift and estate tax exemption. The TCJA increased the exemption from $5 million to $10 million (indexed for inflation) from 2018 through 2025.
While the final regulations still leave several other issues unresolved, the key takeaway is the Treasury Department and IRS confirmed that the benefit of consuming the increased exemption amount temporarily available from 2018 through 2025 will not be retroactively eliminated if the individual using the temporary increase survives beyond 2025.
Additionally, the final regulations do not modify the answers to the four questions addressed in the proposed regulations, and provide additional examples as well as answers to additional questions raised during the public comment period.
>> Read Proposed Regulations Address 4 Key Questions about the TCJA’s Changes to Gift and Estate Tax Exemption
Just as important, the preamble to the final regulations address additional issues not addressed in the proposed regulations. We discuss those issues below.
1. Inflation Adjustments
The Treasury Department and IRS clarified that an individual cannot receive a double benefit of the exemption amount due to the effect of inflation adjustments.
For example, assume an individual makes cumulative lifetime gifts of $7 million from 2018 through 2025. This individual would have consumed all $5 million of the permanent portion of the exemption amount and $2 million of the temporary portion of the exemption amount. If this individual dies after 2025 when the inflation adjusted permanent portion of the exemption amount is $6 million, this individual does not receive an additional $1 million of exemption for use against the individual’s estate tax. At this individual’s death, all of the exemption amount is deemed consumed and no exemption amount is available to reduce the estate tax.
2. Deceased Spousal Unused Exclusion (DSUE)
Beginning in 2011, the unused portion of the exemption amount at the death of a spouse can be transferred to the surviving spouse. The Treasury Department and IRS confirmed that the amount of the DSUE transferred to the surviving spouse will not be reduced if the predeceased spouse dies from 2018 through 2025 and the surviving spouse survives beyond 2025.
>> Read “Why You May Want to Transfer Your Unused Estate Tax Exemption to Your Spouse”
For example, if one spouse dies in 2020 and $9 million of exemption is transferred to the surviving spouse, the surviving spouse will have $9 million of additional exemption available for consumption before or after 2025 even though the surviving spouse’s own exemption will decrease after 2025.
3. Ordering Rules
The Treasury Department and IRS explained that the gift and estate tax exemption amount is consumed in the following order:
2. Permanent portion of the individual’s own exemption
3. Temporary portion of the individual’s own exemption
A suggestion was made during the public comment period that the temporary portion of the exemption amount be deemed to be consumed before the permanent portion of the exemption amount. The Treasury Department and IRS did not adopt this suggestion.
4. Generation Skipping Transfer (GST) Tax
In certain instances, the GST tax is applied to gifts or transfers at death to persons two or more generations younger than the transferor, in addition to the gift or estate tax. The exemption available to use against the GST tax is equal to the gift and estate tax exemption (i.e. $5 million or $10 million from 2018 through 2025, adjusted for inflation). The Treasury Department and IRS indicated there is nothing in the statute to suggest that the automatic reduction in the exemption amount scheduled for January 1, 2026, would have an impact on the allocation of the temporary increase in the GST tax exemption available from 2018 through 2025. This response seems to imply that if, for example, a gift of $8 million is made to a trust in 2021 and $8 million of GST tax exemption is allocated to that trust, the trust would have an inclusion ratio of “0” both before and after 2025. However, the Treasury Department and IRS indicated addressing issues related to the GST tax is beyond the scope of these final regulations and did not indicate if this issue would be addressed in future guidance.
5. Anti-Abuse Rule
The Treasury Department and IRS appeared to express interest in issuing future guidance so certain transfers structured as gifts between 2018 through 2025 would not benefit from these regulations — namely those in which the transferor retains sufficient powers over the transferred property where the value of the property is included in the transferor’s gross estate at death. An individual may engage in this type of transaction for the sole purpose of enjoying the benefit of the temporary increase in the exemption amount without having to give up control of the property, and only be liable for estate taxes on the increase in the fair market value of the property from the date of the gift to the date of death.
Absent any future legislative changes related to the gift and estate tax, taxpayers now have assurance that the additional inflation adjusted $5 million exemption available through the end of 2025 can be used without concern that the benefits will be retroactively eliminated at death.
As a result of this assurance, individuals should consider realizing the benefits of the temporary inflation adjusted $5 million increase in the gift and estate tax exemption amount either before it expires on January 1, 2026, or before it’s curtailed earlier through legislative action.
>> Read the final regulations.
Contact Michael Boncher at firstname.lastname@example.org, Alane Boffa at email@example.com or a member of your service team to discuss this topic further.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.