The IRS has provided some estate planning comfort for well-to-do individuals.
Under the Tax Cuts and Jobs Act (TCJA), the estate tax exclusion was raised to $10 million, indexed for inflation. That provides plenty of leeway for most families. However, like many other TCJA changes for individuals, this provision is scheduled to “sunset” after 2025.
Now the IRS has issued new proposed regulations that say you can rely on the favorable estate and gift tax exemption amount after 2025 (IR-2018-229, 11/20/18).
First, take a step back to trace the evolution of the estate tax exemption. Generally, estate and gift taxes are calculated by using a unified rate schedule for taxable transfers of money, property and other assets. Any tax liability is determined after applying a credit based on the tax exclusion amount.
The credit is used first during your lifetime to offset gift tax. Any remaining credit is then available to reduce or eliminate estate tax your family would owe.
Going back to near the turn of the century, the exemption amount was $1 million, relatively small by today’s standards. But the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 gradually raised the exemption amount to $3.5 million, with a one-year reprieve from estate tax in 2010. Subsequent legislation bumped up the exemption amount to a high of $5 million.
Finally, the TCJA increased the exemption amount from $5 million to $10 million for 2018 through 2025, subject to inflation indexing. For 2018, the inflation-adjusted exemption is $11.18 million. (The IRS recently indicated that the exclusion amount for 2019 is $11.4 million.)
Note also that a “portability provision” was added along the way. This enables the estate of a surviving spouse to benefit from the unused portion of the exemption amount of a deceased spouse. Thus, a couple can effectively shelter up to $20 million from estate tax, indexed for inflation. (The total for 2019 is $22.8 million.)
However, barring any other changes in the tax law, in 2026 the exemption amount will revert to the 2017 level of $5 million (adjusted for inflation).
This could leave some individuals in a quandary. To address concerns that an estate tax could apply to gifts that are exempt from gift tax by the increased exemption amount after 2025, the IRS has issued new proposed regulations. The proposed regs provide a special rule that allows an estate to compute its estate tax credit using the higher of (1) the exemption amount applicable to gifts made during your lifetime or the (2) the exemption amount applicable on the date of death.
In effect, this gives you an “out” for large gifts made during the period of 2018 through 2025.