In December 2017, Congress passed, and the President signed, the “new tax law” which originally was named the “Tax Cuts and Jobs Act” or “TCJA” (but in the budget reconciliation process, the act lost its name). In that new law, Section 2010(c)(3) was amended to provide that for decedents dying and gifts made after 2017 and before 2026, the basic exclusion amount would be increased from $5 million up to $10 million, adjusted for inflation using the Chained Consumer Price Index for All Urban Consumers. After figuring in inflation, that meant that a US citizen or permanent resident could give away or die with $11.18 million free of gift and estate tax.
However, the problems identified by tax practitioners were: (#1) what if you had given away more than the exclusion amount prior to 2018 and had to pay a tax – would the new increased exemptions somehow nullify the payment of the tax and how that might have been treated without the increase? (#2) what if you give away more than the old exclusion but less than the increased exclusion amount during 2018-2025 and then make gifts or die after 2025 – will the drop in the exclusion amount penalize you? Those legitimate questions were raised because of the method by which gift and estate taxes are computed. Those are the “Clawback Problem.” Congress told the IRS to address the Clawback Problem when it passed TCJA. Some commentators thought the language in TCJA was in the wrong places (that is, the wrong Code sections were amended to allow the IRS that authority) and, because of that, the IRS would not be able to eliminate the Clawback Problem.
The IRS has just proposed regulations which would eliminate the Clawback Problem. In REG-106706-18, the IRS has issued a notice of proposed rulemaking and notification of public hearings. The preamble to the proposed regulation, in a lengthy discussion, lays out the background and concerns of commentators, and then carefully explains the computation of gift and estate taxes under various scenarios. It concludes in its preamble that Clawback Problem #1 described above is not actually a problem because the method of computation, if correctly applied, resolves that issue. But, to address Clawback Problem #2, it proposes a new subsections (c), (e) and (f) to Reg.Sec. 20.2010-1 which have the effect of eliminating the Clawback Problem. Basically it says that if an individual makes gifts, the exclusion amount at the time of the gifts will be deemed to be the exclusion amount applied after 2025 to further gifts and to the individual’s estate at death.
The Example provided is as follows:
(2) Example. Individual A (never married) made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative total of $10 million in basic exclusion amount allowable on the dates of the gifts. A dies after 2025 and the basic exclusion amount on A’s date of death is $5 million. A was not eligible for any restored exclusion amount pursuant to Notice 2017-15. Because the total of the amounts allowable as a credit in computing the gift tax payable on A’s post-1976 gifts (based on the $9 million basic exclusion amount used to determine those credits) exceeds the credit based on the $5 million basic exclusion amount applicable on the decedent’s date of death, under paragraph (c)(1) of this section, the credit to be applied for purposes of computing the estate tax is based on a basic exclusion amount of $9 million, the amount used to determine the credits allowable in computing the gift tax payable on the post-1976 gifts made by A.
If you would like a copy of the Preamble and Proposed Regulation, feel free to send me an email and I will email a copy back to you.
HAPPY THANKSGIVING!
All of us here wish you a happy and safe Thanksgiving.