IRS proposes rules on estate and gift tax clawback

Editor: Sally P. Schreiber, J.D.

In proposed regulations issued Nov. 21 (REG-106706-18), the IRS amended Regs. Sec. 20.2010-1 to conform with the temporary increase in the basic exclusion amount for estate and gift tax enacted by legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.

For gifts made and estates of decedents dying before Jan. 1, 2018, prior law (Sec. 2010(c)(3)(A)) provided an exclusion from taxable gifts or estates of $5 million, indexed for inflation after 2011. For gifts made or estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026, the TCJA increased the amount to $10 million, also indexed for inflation after 2011 (Sec. 2010(c)(3)(C)). Thus, the amount for 2017 was $5.49 million and, for 2018, $11,180,000 (rising to $11.4 million in 2019). The proposed regulations would amend Regs. Sec. 20.2010-1(e)(3) to conform to the TCJA’s increase in the exclusion amount and changes regarding the cost-of-living adjustment.

The TCJA also, in Sec. 2001(g)(2), granted the IRS authority to prescribe regulations to carry out Sec. 2001, which governs the imposition and rate of estate and gift tax, with respect to any difference between the basic exclusion amount applicable at the time of a decedent’s death and with respect to any gifts the decedent made.

Commenters have raised questions about inconsistent tax treatment that could arise as a result of the temporary nature of the increased exclusion amount, the IRS said in a preamble to the proposed regulations. Particularly, these commenters pointed out, the statutory sunset of the higher basic exclusion amount and reversion to the lower amount could, in effect, retroactively deny taxpayers who die after 2025 the full benefit of the higher exclusion amount applied to previous gifts.

This scenario has sometimes been called a “clawback” of the applicable exclusion amount and was a concern in 2012, with the impending sunset of a similarly temporary increase in the exclusion (to $5 million, adjusted for inflation) that had been provided under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. In that case, the issue was avoided altogether by the increase’s being made permanent by the American Taxpayer Relief Act of 2012, P.L. 112-240.

Consequently, the IRS is proposing a special rule for such cases: In calculating a decedent’s estate tax, when the portion of the credit as of the decedent’s date of death that is based on the exclusion amount is less than the sum of the credit amounts attributable to the exclusion amount allowable in computing gift tax payable on post-1976 gifts, the portion of the credit against the net tentative estate tax that is attributable to the exclusion amount would be based upon the greater of those two credit amounts (Prop. Regs. Sec. 20.2010-1(c)).

For example, if an unmarried individual made post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025, when the basic exclusion amount is $5 million, the special rule would allow the applicable credit amount against estate tax to be based on a basic exclusion amount of $9 million (Prop. Regs. Sec. 20.2010-1(c)(2)).

The proposed rules will be effective when they are finalized.