IRS Issues Guidance on U.S. Estate and Gift Tax

Volume No. US-19-16

As part of the 2017 Tax Cuts and Jobs Act (TCJA), P.L. 115-97, Congress almost doubled the basic exclusion amount (BEA) from US $5,600,000 to $11,180,000 as of January 1, 2018.  The BEA is indexed for inflation and will be US $11,580,000 for 2020 (see paragraph 41 of Rev. Proc. 2019-44). 

The US $5,000,000 BEA was introduced as part of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) as signed into law by President Barrack Obama on December 17, 2010.  The BEA is indexed to inflation and adjusted annually.

Since the 2017 TCJA was not revenue neutral and President Trump did not have the 60 votes in the Senate to override the Byrd Rule, certain provisions of the TCJA are set to sunset as of December 31, 2025.  The estate and gift tax BEA is one of the provisions that will sunset. Absent any further action by Congress as of January 1, 2026 the BEA will be revert to US $5,000,000 (as adjusted for inflation).

One question that almost immediately came up, is what happens if a taxpayer utilizes the increased BEA for gift tax purposes (during the period of January 1, 2018 to December 31, 2025) and the BEA, does actually revert as of January 1, 2026?  Would there be any sort of “recapture” mechanism to claw back the enhanced exemption/credit that was claimed?

The answer is no. 

On November 26, 2019 the IRS issued Treasury Decision (T.D.) 9884, “Difference in the Basic Exclusion Amount”.  The document contains the final regulations, with respect to this issue, and are effective on or after November 26, 2019. Previously the IRS had issued, on November 23, 2018, a notice of proposed rulemaking (proposed regulations).

The final regulations adopt a special rule in cases where

  1. The portion of the credit against the estate tax that is based on the BEA (at the time of death – post January 1, 2026) is
  2. Less than the sum of the credit amounts attributable to the BEA allowable in computing the gift tax payable (for the period of January 1, 2018 to December 31, 2025).

In other words the taxpayer, while alive and during the period of January 1, 2018 to December 31, 2025, made taxable gifts and sheltered the resulting gift tax by claiming the enhanced credit.  Remember, in general, only US $15,000 can be given to any donee before a gift tax liability may arise.  Any taxable gifts above US $15,000 may be sheltered by claiming part of the unified credit.

The final regulations offer a number of examples to clarify.  The final regulations also address the allowable credit in cases where a taxpayer has died and the surviving spouse has made the deceased spouse’s unused exemption (DSUE) election.

What is also clear is that, as of January 1, 2026 there is no ability to use any of the enhanced credit that may remain. There is no “carry over” of unused enhanced credits.  If the taxpayer does not use the increased exemption, he will lose it.  As such, taxpayers may wish to consider making gifts before December 31, 2025.

It may be possible that Congress will act on this before December 31, 2025.  Given the uncertainty in Congress and the 2020 Presidential election, one cannot determine, with any level of certainty what may or may not happen.  Taxpayers should consider taking advantage of the opportunity while present.

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