Blog Home

IRS Announces “No Clawback” of Gift Tax Exemption Amount

On November 20, 2018 the IRS issued proposed regulations (expected to be passed) clarifying that the estate/gift tax will not apply to gifts made before 2026, when the amount that can be sheltered from the tax is higher, as provided for by the 2017 Tax Act.

Why does this matter?

Because of the technicality in the way the estate tax is calculated. That is, the gifts made before 2026 would otherwise have to be included back into the estate without an offset by the higher exemption amount that was available then; without further guidance, the lower exemption amount effective for 2026 and thereafter must be used. “Clawback” refers to bringing back into the estate the gifts made when the exemption amounts were higher and taxing them anyway if death occurs in 2026 or later. This would mean that the only way to benefit from the higher exemption amount is to die between 2018 and 2025. It’s a mere technicality that really, really matters.

The Numbers

  • The 2017 Tax Act increased the amount individuals and couples can transfer to heirs on a temporary basis. The combined estate/gift tax-free amount per individual and per couple in 2018 is $11,180,000 and $22,360,000, respectively. The IRS just announced the updated inflation-adjusted amounts for 2019, which are $11,400,000 per individual, $22,800,000 per couple.
  • The increased exemptions are due to expire in 2026, when the amounts revert back to their 2017 level of roughly $6,000,000+ per individual/$12,000,000+ per couple, subject to the usual inflation adjustment.
  • The IRS confirmed in the November 20, 2018 Revenue Procedure 2018-57 that this is a “Use It or Lose It” proposition. That is:
    • Before 2026, wealthy families with an estate valued at approximately $12 million per individual/$23M per couple or under will not be subject to estate tax on gifts made up to this threshold — if death occurs before 2026.
    • If death occurs after 2025, these same wealthy families with estate values above $6,000,000 per individual / $12,000,000 per couple, will once again be subject to the tax.

Estate/Gift Exemption Amounts – Annually Adjusted for Inflation

2017 2018 2019-2025 (Indexed) 2026 (Plus Inflation)
$5,490,000 Individual / $10,980,000 Married Couple $11,180,000 Individual / $22,360,000 Married Couple $11,400,000 Individual / $22,800,000 Married Couple $6,000,000 Individual / $12,000,000 Married Couple
  • The IRS also clarified that for purposes of computing the estate tax for decedents dying after 2025, gifts which were sheltered by the increased exemption from 2018-2025 will not be subject to estate tax. In other words, there is no “clawback” of the gifts.

A Very Simple Example

Example of $10M Gifts Made Between 2018-2025 1

WITH CLAWBACK

WITHOUT CLAWBACK

Date of Death

Date of Death

2018-2025

2026+

2018-2025

2026+

Exemption from Estate / Gift Tax

$11,180,000 (+ inflation) $6,000,000 (+ inflation) $11,180,000 (+ inflation) $6,000,000 (+ inflation)

2018 Gifts Made

$10,000,000 $10,000,000 $10,000,000 $10,000,000

2018-2025 gifts added back in estate tax calculation

$10,000,000 $10,000,000 $0 $0

Gifts subject to estate tax @ assumed date of death

$0 $4,000,000 $0 $0

1 This hypothetical example assumes a total of $10M of gifts made between 2018-2025 with no additional gifts made in 2026 or thereafter. This example is meant to simply the estate tax calculation in concept only to illustrate the effects of a clawback. Note that any gifts made in excess of the applicable exemption available in years 2018-2025 would be added back into the estate tax calculation at date of death and be subject to estate tax.

Print Friendly, PDF & Email

Other Posts