With the historically high gift and estate tax exemption amounts ($11,180,000 in 2018, increasing to $11,400,000 in 2019) currently in effect, wealthy taxpayers are encouraged to make lifetime gifts to use up some or all of their lifetime estate tax exemption before the tax law changes or the exemption amount “sunsets” on December 31, 2025. However, there has been some concern among advisers that a future reduction in the estate tax exemption could trigger tax – either during lifetime or at death – to “claw back” exemption used before the exemption amounts were reduced.
On November 23, 2018, taxpayers and their advisors received welcome news regarding this concern. The IRS issued proposed regulations stating that if the gift/estate tax exemption is reduced in the future, taxpayers who have utilized their gift tax exemption for lifetime gifts will not be forced to pay gift tax on the exemption used in excess of the reduced exemption amount. Likewise, a taxpayer who has used their exemption amount for lifetime gifts and later dies when the estate tax exemption is less than the exemption used will not incur estate tax on such prior gifts. This is good news for taxpayers and should remove concern with using the high exemption amounts while such exemptions are in effect.
Absent tax legislation in the meantime, when the current exemption amounts expire in 2025, an individual’s exemption amount will be reduced to $5,000,000 (indexed for inflation). In light of the proposed regulations, individuals with an estate in excess of $5,000,000 (and married couples with a combined estate in excess of $10,000,000) should strongly consider implementing planning to utilize their estate tax exemption before the law changes. There are many planning techniques that can be implemented to shelter assets from future estate tax, while still making the gifted assets available to the donor’s family if needed. If you or your clients have an interest in appropriate tax planning techniques, please contact Jeff Gehring in the Lexington, Kentucky office at 859-899-8713, or another estate planner in one of our Dickinson Wright offices.