The increase in the estate tax exemption amount under the Tax Cuts and Jobs Acts (TCJA) is set to “sunset” or expire on December 31, 2025, and many advisors are encouraging their high net worth clients to make large gifts before that date as to “use up” the exemption amount. Some advisors were concerned that such gifting would trigger an additional transfer tax when the exemption reverted back to pre-TCJA amounts, allowing the Internal Revenue Service to “claw back” any used amount over the exemption rate at the time of the taxpayer’s death.
On November 22, 2019, the IRS issued final regulations confirming that used gift tax exemption will not be “clawed back” upon the person’s death, even if they made gifts in excess of the estate tax exemption ultimately in effect at the time of death. Also, a surviving spouse who received unused estate tax exemption from a predeceased spouse — referred to as the Deceased Spousal Unused Exemption (“DSUE”) — can utilize the DSUE amount during lifetime or at death without fear of a clawback or loss of the DSUE.
Tax laws can change with every year and every election, but with the 2020 presidential election looming and the possibility of a shift in the dynamic of Congress, a reduction in gift and estate tax exemptions could take place prior to the end of 2025. Wealthy taxpayers should not wait until December of 2025 to make large gifts to make the most of the increased exemption amounts.
See Dickinson Wright, Final Regulations Confirm No Clawback on Gifting, Lexology, December 9, 2019.