Gift Tax Update – Taxable Gifts and the I.R.S. Anti-Clawback Regulation

by Melissa Miele Bracuti

For 2019, for U.S. citizens, the Federal estate and gift tax basic exclusion amount is $11.4 Million per individual and the Federal gift tax annual exclusion amount is $15,000 per donee, per year.  In 2019, an individual can pass up to $11.4 Million estate and gift tax free; for married couples, the figure is doubled.

Making gifts in excess of the $15,000 annual exclusion amount will chip away at the maximum amount that an individual can give away gift tax-free during life.  If an individual (a “donor”) gifts $15,000 to each of ten donees in 2019 for a total of “taxable” gifts in the amount of $150,000, there will be no gift tax due, and there is no decrease in the donor’s $11.4 Million available estate and gift tax basic exclusion amount. In contrast, if a donor gifts $150,000 to a single donee in 2019, only $15,000 of the gift would be exempt from gift tax, and the donor must file a gift tax return showing an excess gift of $135,000.  The donor will not have any tax due; however, the $11.4 million of available exclusion amount will be reduced by the excess gift of $135,000. Thus, the larger the gifts, the quicker a donor will use up his or her $11.4 Million exclusion amount. Given the sizable exclusion amount in 2019, most people would never come close to using the entire exclusion amount.

The Tax Cuts and Jobs Act of 2017 put the whopping $11.4 Million exclusion amount into effect – but the law is only temporary. The law will sunset and for the year 2026, the exclusion amount will automatically drop to $5 Million (adjusted for inflation) if Congress fails to act by the end of 2025. Many estate planning practitioners believe the exclusion will revert to an amount of approximately $6 Million for 2026.

Planners have raised questions due to the temporary nature of the $11.4 Million exclusion amount. In the event that a gift is made in accordance with the applicable exclusion amount in effect at the time the gift was made, but the exclusion amount decreases by the time of the donor’s death, will the donor’s excess gift be subject to a “clawback” and, accordingly, be included in the donor’s taxable estate for Federal estate tax purposes? In an effort to resolve the question, on November 20, 2018, the IRS released a proposed regulation to eliminate “clawback” for estate and gift tax purposes.

The IRS proposed regulation provides that the donor’s estate can compute its estate tax credit using the higher of the “Basic Exclusion Amount” applicable to gifts made during life or the “Basic Exclusion Amount” that applies on the date of the donor’s death. REG-106706-18, (83 Fed. Reg. 59343).  Therefore, if a donor dies on or after January 1, 2026, but made taxable gifts prior to 2025 relying on a higher exclusion amount and, in the year of his or her death, the applicable lifetime gift tax exclusion amount is lower than the amount gifted prior to 2025, the donor’s estate will have the benefit of using the higher exclusion amount that applied during his or her life. The proposed regulation should inspire large gift planning and year-end gift planning in 2019.  We encourage you to contact us if you wish to discuss gifting as a part of your estate planning.