No “Clawback” of Lifetime Gifts Exceeding the 2017 Estate Tax Exemption Amount

Important information previously provided to our Wealth Management & Advisory Services financial planning clients:

Some good news just came in for those who have an estate that may be potentially subject to federal estate and gift taxes. You might recall that the Tax Cuts and Jobs Act doubled the lifetime federal estate and gift tax exemption from $5,000,000 per person in 2017 to $10,000,000 per person in 2018 (those amounts were also inflation adjusted so the current amount in 2018 is actually $11,180,000). This exemption is going to increase to $11,400,000 per person in 2019.

Most estate and financial planners have been counseling clients to make large gifts to family to take advantage of this increase in the lifetime federal tax exemption. But many were fearful that when this doubling provision expires in 2026, and the exemption is set to revert back to half this amount, the IRS may make people pay gift taxes on the extra amount that they gave during the period of the higher exemption. As such, some individuals have been reluctant to move forward with such large gifts.

The IRS recently came out with proposed regulations that say they will not claw back the gifts a person makes during lifetime that exceed the old federal exemption amount. So, they are basically giving people of that wealth a free pass to move assets away before 2026 without fear of being taxed.

For example, if an unmarried individual made post-1976 taxable gifts totaling $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 back to $5 million, this special regulation would allow the tax exempt amount to be based on a basic exclusion amount of $9 million (under Proposed Regulation Sec. 20.2010-1(c)(2)).

Great news for those in need of transferring large amounts out of their estates!

These proposed regulations are open for comment and the rules will be effective when finalized. We will do our best to keep our clients up to date if this IRS position changes. Also remember that Washington and Oregon have separate state estate tax regimes yet no gift tax. So be sure to speak with someone who can address the impact of this clawback rule to your state tax rules.

If you have questions about how this new information may affect your personal situation please feel free to contact your Wealth Management & Advisory Services Relationship Manager.

And as always, this does not constitute legal or tax advice – please reach out to your legal advisors before executing any tax strategy.

The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

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