Estate Taxes and Gift Taxes – I Love a Good Sunset, But …..
In 2017 Congress passed and the President signed the Tax Cuts and Jobs Act (TJCA). The TCJA made significant changes to individual income taxes as well as estate and gift taxes. This included raising the estate, gift, and generation skipping transfer tax exemptions from $5 million per person indexed for inflation to $10 million per person indexed for inflation. With the TCJA, Congress chose to make many of the individual provisions temporary to limit the revenue cost of the TCJA. For individual taxpayers, almost all provisions “sunset” at the end of 2025, while most business provisions are permanent. “Sunsets” are provisions of a law that cause provisions of the law to expire at a specified date. Without additional tax law changes, beginning in the tax year of 2026 the estate and gift tax exemptions will revert to their former levels under prior tax law. The current estate tax and gift tax exemption indexed for inflation is $12.06 million per person, under the prior law, the exemption would be roughly one-half of that amount. Because of these potential changes, many are planning to use some, or all, of their exemption amount now and not risk losing it if this sunset occurs.
The IRS has provided some guidance on the question of what exemption amount the government will apply if a person makes a gift now that is less than the current exemption amount but dies following any reduction in 2026. In November 2019, the IRS issued regulations stating that it would not “claw back” taxes on a large lifetime gift made after the exemption amount is reduced. This means, for example, that if a person makes a gift of $12 million in 2025 and the exemption amount is subsequently reduced in 2026 to $6 million, they will not have to pay estate tax on they will not have to pay estate tax on the difference. This is great news for planning.
A word of caution, however, in April 2022, the IRS issued proposed regulations clarifying the 2019 anti-claw back regulations. According to the proposed regulations, gifts to trusts that allow the grantor continued access to the gift will not receive the benefit of the anti-claw back regulations. This would include gifts to grantor retained annuity trusts, grantor retained income trusts, and qualified personal residence trusts. However, gifts to other types of trusts that might allow the grantor continued access are still subject to anti-claw back protection, including the following types of trusts: special needs trusts, charitable remainder trusts, marital trusts, credit shelter trusts, irrevocable life insurance trusts, and certain spousal lifetime access trusts.
The most important thing to understand is that the clock is ticking. As we found out last year, if it appears sunset will occur, there will be a massive rush to do things over a very short period of time. Better practice would be to speak to a qualified advisor now about being ready for changes that may come, even if you wait to implement them.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.