When Congress enacted tax reform in December 2017, federal gift and estate tax “basic exclusion amount” (often referred to as the “gift and estate tax exemption”) increased to $10 million per person (from $5 million), indexed for inflation ($11,180,000 in 2018 and $11,400,000 in 2019). Absent further legislation, this portion of tax reform sunsets on December 31, 2025 and the basic exclusion amount reverts back to $5 million per person, indexed for inflation. An issue arose as to whether gifts made after 2017 in excess of the pre-tax reform basic exclusion amount, up to the tax reform basic exclusion amount (“delta gifts”), would be pulled (“clawed”) back into the estate of a person who died after the sunset date of the legislation and subjectedto the federal estate tax.
On November 23, 2018, the Internal Revenue Service issued proposed regulations which indicate it will not seek to subject delta gifts to the federal estate tax (i.e., no clawback). These proposed regulations apply to gifts made after 2017 and the estates of persons dying after 2017.
With the uncertainty of clawback removed, we recommend clients consider making large gifts to reduce the size of their estates, taking advantage of the increased federal exemption amounts. For our clients in Washington, Oregon and New York, which have stand-alone state estate taxes, but no gift tax, such gifts are doubly important and beneficial. Note that some gifts must be included in the estates of New York decedents until January 1, 2019; for persons dying on or after January 1, 2019, no prior gifts, whenever made, need to be included in the New York estate. Prior gifts are not included in the estates of Washington or Oregon decedents, regardless of when the decedent dies or when any prior gifts were made. Presently, there is no state estate tax in California.
Prior to any such gifting, we also recommend conducting an analysis of the income tax consequences. A recipient of gifted assets takes the donor’s basis for federal income tax purposes (a “carry-over basis”); whereas, under current federal law, the basis of assets which are subject to the federal estate tax, and received as a result of a person’s death, is equal to fair market value at the date of the decedent’s death (often a “stepped-up basis” if the value at death is higher than the decedent’s basis prior to death).
Clients may wish to take advantage of the increased basic exclusion amount sooner rather than later, as such large gifts often take some time due to planning (goal setting, economic and tax modeling, etc.), appraisals, and preparation of trust and other documents. Should Congress change the law again prior to the sunset date, those who have not used the larger basic exclusion amount will have lost the opportunity to do so.
We recommend you discuss with your advisors the efficient use of the increased basic exclusion amount.
Dana Reid is a trusts and estates and tax exempt organizations attorney with 20 years’ experience advising clients on all aspects of estate planning, including business succession and intergenerational planning, and gift, estate, and generation-skipping transfer tax matters. Her work also includes charitable planning, with a focus on creating and supporting private foundations, nonprofit public charitable organizations, and charitable remainder and lead trusts. Dana can be reached at firstname.lastname@example.org or directly at 206-757-8116.