On 20 November 2018, the United States Internal Revenue Service (IRS) issued proposed regulations relating to changes to estate tax rules made by the comprehensive tax reform bill, the Tax Cuts and Jobs Act (TCJA) of 2017. These regulations are intended to provide taxpayers with certainty regarding new tax relief contained in the law.
While the TCJA did not repeal the estate tax — contrary to the wishes of many Republicans in Congress — it substantially raised the amount that a person can transfer during or after their life free of tax, but only until 2025. As a result of the TCJA, in 2018, the combined exemption amount for the estate tax, gift tax, and generation-skipping transfer tax increased to $11.18 million (per couple), up from $5.49 million in 2017. This threshold will continue to be adjusted for inflation until 2026, when it will revert to the 2017 level.
Under the US tax code, gift and estate taxes are assessed on the value of a transfer that is not exempt, at 40%. Liability is calculated based on the aforementioned "base exclusion amount (BEA)" and other elements described in the regulations. The credit is used first during life, to reduce gift tax liability, and any remaining credit is then available to reduce or eliminate estate tax liability after death.
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The new regulations are intended to provide assurances to those taxpayers who are considering making sizeable gifts from 2018 to 2025 concerning their future estate tax liability.
The regulations say that individuals taking advantage of the increased gift and estate tax exclusion amounts 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.
Specifically, they provide that individuals who make large gifts between 2018 and 2025 will not lose the enhanced tax benefit after 2025. The concern is that those making large gifts prior to 2025 and who die after that year will have used up a large part of the exclusion amount, or all of it, once the exclusion amount reverts to pre-2018 levels.
The regulations state:
"To address concerns that an estate tax could apply to gifts currently exempt from gift tax, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the [base exclusion amount] applicable to gifts made during life or the [base exclusion amount] applicable on the date of death."
The US Treasury Department and the IRS are accepting comments from the public on all aspects of the proposed regulations until 21 February 2019. In addition, a public hearing on the proposed regulations has been scheduled for 13 March 2019.
Tax Planning Implications
Only a small number of estates are thought to be affected by the change. However, the regulations will provide clients with surety of their future estate tax liability so they can plan with certainty.