One of the centerpiece provisions of the Tax Cuts and Jobs Act, enacted on December 22, 2017, was the doubling of the lifetime exclusion. Also sometimes referred to as the basic exclusion amount (BEA), this exclusion generally dictates the amount of cash, property (at fair market value) and other assets that a taxpayer may gift during their lifetime or bequeath at death to other individuals, usually junior generation family members, without incurring the federal gift and estate tax. For 2018, the inflation-adjusted lifetime exclusion is $11.18 million. Married couples utilizing gift-splitting can double that amount.
While expansion of the lifetime exclusion is a welcome change for many taxpayers, it is noteworthy that the change is included in the temporary provisions of the law and will revert to pre-Tax Cuts and Jobs Act levels for years beginning after December 31, 2025.
Given the temporary nature of the provision, many having been wondering if the transfer of assets under the higher threshold could have a negative effect on their estates when, and if, the law reverts back.
The IRS announced in IR-2018-229 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 [and if]the exclusion amount is scheduled to drop to pre-2018 levels.
The Treasury Department and the IRS have issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA). As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.
In general, gift and estate taxes are calculated, using a unified rate schedule, on taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount.
The applicable exclusion amount is the sum of the BEA, or lifetime exclusion, established in the statute, and other elements (if applicable) described in the proposed regulations. As noted, the credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.
To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.
Treasury and IRS welcome public comment, and the proposed regulations provide details on how to submit comments.
Planning under the expanded lifetime exclusion should be undertaken with great care and a view of life expectancies, possible basis step-ups for property transferred at death and senior generation economic needs.