IRS Says No “Clawback” When Estate and Gift Tax Basic Exclusion Amount Reverts to Old Limits

drawing a dollar sign

The Tax Cuts and Jobs Act temporarily doubled the value of assets that can be transferred without triggering estate or gift tax. Commentators and our clients have been asking whether the Internal Revenue Service (IRS) might “claw back” the benefits of the higher basic exclusion amount (BEA) once the increase “sunsets” at the end of 2025 and the BEA reverts to the lower amounts. In other words, and simply stated as an example: After reversion to the lower BEA, will the IRS calculate the estate tax due at a taxpayer’s death after 2025 as if the increased BEA never existed?

The IRS issued proposed regulations on November 20, 2018, stating that individuals making gifts and taking advantage of the increased BEA (or the increased applicable exclusion – generally, the sum of an individual’s BEA and the remaining BEA of the deceased spouse of the individual) in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. In other words, there will be no clawback.

The 2018 BEA is $11.18 million and for 2019, the BEA is $11.4 million.

Some of our clients with significant estates have delayed making gifts above the lower permanent BEA because of concerns about this possible clawback. While there are other considerations that must be taken into account in planning gifts, this is one uncertainty that has now been resolved by the IRS.

Please contact your HM&M tax advisor for more information.

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