On November 20, 2018, the IRS proposed regulations that eliminate the claws of the clawback. In the announcement, the IRS said that individuals who take advantage of the increased gift and estate tax exclusion amounts that are in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. The initial concern for taxpayers was that the statutory sunset of the higher basic exclusion amount for estate and gift tax purposes enacted as the Tax Cuts and Jobs Act (TCJA), P.L 115-97, coupled with the reversion to the previous lower amount, would deny taxpayers who die after 2025 the tax benefit of the higher TCJA exclusion amounts.
Since the basic exclusion amount is expressed in a gift or estate tax calculation as a credit against tentative tax (such as upon death), the IRS has proposed a special rule where the allowable credit amount as of a decedent’s death will be “the higher” of the two exclusions available. The TCJA temporarily increased the exclusion amount from $5 million to $10 million for 2018-2025, adjusting for inflation. In 2026, the exclusion amount will revert to the 2018 level of $5 million adjusted for inflation. In other words, if a taxpayer gave away $10 million today, and the exclusion amount reverts back to $5 million in 2025, the taxpayer would be allowed to shelter the entire $10 million upon death.
The proposed regulations are not effective until finalized, but certainly provide the needed clarity for current planning purposes. As always, the potential wild card in all of this is the political lightning rod that the exclusion amount represents and the fact that a future Congress or administration may deem further changes appropriate.