An Important Estate and Gift Tax Planning Question Answered
The IRS announced recently that enhanced estate and gift tax planning opportunities will not be clawed back once the provisions expire. This is good news, but it highlights the fact that the tax reform benefits for large estates are temporary opportunities that will expire after 2025, if not extended. Taxpayers seeking to implement a wealth transfer strategy in the most tax-efficient manner should take advantage of these incentives while they last.
Estate Tax Primer
Gift and estate taxes are generally calculated using a unified tax rate schedule that is applied to one’s taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount. The exclusion amount essentially allows a person to transfer wealth valued up to a set amount without it being subject to the Estate, Gift, and Generation-Skipping Tax.
The tax law commonly known as the Tax Cuts and Jobs Act (TCJA) dramatically increased the exclusion levels for the Estate, Gift and Generation-Skipping Tax from $5,490,000 in 2017 to $11,180,000 in 2018. In 2020, the exclusion level is $11,580,000 per person. Under current law, this exclusion level will continue to increase based upon adjustments for inflation, but the elevated levels under the TCJA are scheduled to expire after 2025. It is entirely possible that the exclusion amounts will plummet at that time, and return to the 2017 level, adjusted for inflation.
Expiration Date and Uncertainty
The potential reset of this exclusion level caused concern for some taxpayers who previously made (or were actively contemplating) moves to take advantage of the elevated exclusion levels. Taxpayers were concerned that a nontaxable gift made prior to 2026 might retroactively become taxable if the person who made the gift died after 2025. The IRS assuaged this concern in final regulations issued November 22 by clarifying that estates can calculate their credit based on the higher of the exclusion amount at the time of the transfer or the exclusion amount at the time of the transferor’s death.
The temporary nature of these enhanced exclusion amounts, paired with the new assurance that the benefits will not be clawed back, provides a compelling reason for taxpayers contemplating a wealth transfer strategy to act now. Furthermore, with the election in 2020, there is no guarantee that the increased exemptions will survive until 2025; it is possible that a new tax policy could emerge that would accelerate the sunset of the elevated exclusion levels before then.
To mitigate the risks associated with this uncertainty, taxpayers with estates exceeding the 2017 exclusion limits should consider implementing planning strategies now that take advantage of the current levels.
For additional insight into the Estate, Gift, and Generation Skipping Tax, and the strategies that may be appropriate to take advantage of the current exclusion levels, please contact your local CBIZ tax professional and your estate planning attorney.