IRS Establishes No Clawback Rule on Gifts and Estates

‘Tis the season for giving! In a recent announcement, the IRS presented the highly-anticipated final regulations on gift and estate tax exclusion amounts made between 2018-2025, confirming there will be no clawback after the exemption amount sunsets.

The IRS and the Treasury Department have established that taxpayers who take advantage of the $11 million (indexed) gift and estate tax exemption will not be negatively impacted after 2025 when the exemption amount drops back to pre-tax-reform law. The exemption amount is forecasted to sunset at $5 million (indexed).

The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the value of assets that can be gifted to beneficiaries without activating federal estate of gift taxes over a lifetime. These amounts went from $5 million (indexed) to $10 million (indexed). The total exemption amount is $11.4 million in 2019 and will be $11.58 million in 2020.

Many tax professionals were concerned that in 2026, the IRS may attempt to collect taxes on gifts that were made between 2018-2025 during the heightened exemption period, but these final regulations confirm that the agency will not seek retroactive taxes for taxpayers who make gifts after 2017 and the estates of decedents passing away after 2025.

The reason for concern was this: In basic terms, a taxpayer’s estate tax is calculated by combining the taxable estate at death with the lifetime taxable gifts. The total amount is then reduced by the exclusion credit (plus any gift tax paid on the taxable gifts). If the exclusion amount is lower than it was when the taxpayer made the gifts, there is a possibility of taxes being due at death with no assets available to pay the tax.

The anti-clawback rule was set forth into law so that wealthy taxpayers can freely gift to their heirs at the increased exemption amount without worrying about the law’s sunset in 2025.

If you are thinking about gifting to your heirs, now is the time to do it. If you have any questions or need guidance on your estate plan, please contact me at kdmaher@bpw.com or (805) 963-7811.