New proposed regulations by the IRS regarding the gift and estate tax exclusion has helped allay the concerns of many and created opportunities for estate planning over the next few years. Prior to passage of the Tax Cuts and Jobs Act of 2017, the gift and estate tax basic exclusion amount was $5,000,000 ($5,490,000 as adjusted for inflation). This allowed a taxpayer to make lifetime gifts or pass assets to the next generation from their estate up to $5,490,000 without paying gift or estate tax. The Tax Cuts and Jobs Act of 2017 increased that limit to $10,000,000 ($11,180,000 adjusted for inflation in 2018). However, this increase in the basic exclusion amount was only temporary under the new law, and would revert back to the $5,000,000 level after 2025.
The concern for many taxpayers was, what would happen if lifetime gifts were made up to the new limit of $10,000,000 between 2018 and 2025 and the basic exclusion amount then reverted to $5,000,000? Would estate tax apply to gifts made during the time of the higher basic exclusion amount?
To address this, the IRS issued proposed regulations that would provide a special rule that allows the estate to compute its estate tax credit using the higher of the basic exclusion amount applicable to gifts made during life or the basic exclusion amount applicable on the date of death. While this ruling gives many people peace knowing that the IRS won’t attempt to collect tax on gifts that were made tax free in prior years, it also gives taxpayers an opportunity to make gifts tax free at twice the amount they would be able to after 2025. With careful planning, taxpayers will have a unique opportunity to reduce their taxable estate during this period, enabling them to transfer more wealth to their decedents free of estate tax within this range.