The Tax Reform Act of 2017 (the “Act”) has created an opportunity to transfer to younger generations higher levels of assets than previously allowed by federal tax law without paying federal estate or gift taxes. The window for taking advantage of this planning opportunity is limited, however.
THE 2020 ELECTION COULD RESULT IN A ROLLBACK OF THE FEDERAL ESTATE, GIFT AND GENERATION-SKIPPING TRANSFER TAX EXEMPTION LIMITS EVEN SOONER THAN EXPECTED
The Act, passed by Congress and signed into law in December 2017, doubled federal estate, gift and generation-skipping transfer (GST) tax exemptions to $11.4 million ($10 million indexed for inflation) per person. The Act has therefore allowed many of our clients to utilize various estate planning techniques to transfer a larger share of assets to or for the benefit of lower generations free of federal transfer taxes. The Act includes a “sunset” provision, however, stating that the increased exemption amounts will “sunset,” or expire, in 2025, and the exemptions will fall back to $5 million (indexed for inflation from 2011) unless Congress takes further action. If the 2020 election ushers in a Democratic Congress and president, it is possible that Congress could amend the tax code to accelerate the “sunset” and end the increased exemption amount earlier. The current Democratic-led House has already displayed its desire to amend some of the provisions set forth in the Act by introducing a bill this past June that would end the increased exemption on December 31, 2022.
The IRS has stated that it will not “claw back” lifetime gifts once the exemption is reduced in 2025 but will preserve the higher exemption for gifts made during the applicable time period. In 2018, the IRS issued proposed regulations explaining, for example, that if a donor makes a gift of $8 million in 2019 and passes away in 2026 when the tax exemption has reverted back to 2011 levels ($5 million indexed for inflation), the IRS will not “claw back” the gift to tax the roughly $3 million that would exceed the 2026 exemption threshold in the estate tax context. In other words, gifts made during the window when the higher exemption is in effect should be permanently protected from federal estate and gift tax.
The current exemption amount allows for increased tax savings if lifetime gifts exceed $5 million. If you are considering making gifts that would bring your lifetime total into this range, we recommend that you contact our office to explore the planning opportunities available to you and your family while they still exist!
Natalie Chaudhury contributed to the preparation of this client alert.