To Gift or Not to Gift? Gift.

For individuals and families who wish to pass assets to children, grandchildren, and more descendants as part of their overall estate plan, gifting now, rather than later, could provide significant tax benefits. 

We are advising clients of the likely impact of an electoral victory in November for Joe Biden. Biden’s recently published tax plan calls for increases in estate taxes. Wealthy people are especially nervous that an exemption allowing individuals to leave up to $11.58 million to heirs, free of estate or gift taxes, could soon be cut before it expires in 2025. If you like the way the laws are today, you need to take advantage of them now, before they are changed tomorrow. In other words, use it or lose it. 

The IRS recently finalized the proposed regulations relating to the $11.58 million lifetime exemption (basic exclusion amount).  There is definitely some good news here!

In the finalized regulations, the IRS has allowed for a special rule for taxpayers who made gifts during 2018 through 2025 so their estates are not affected by the planned decrease in the lifetime exemption on 1/1/26 (or earlier if Biden changes the law). For example, if an unmarried individual made taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025, when the basic exclusion amount is $5 million, the special rule allows the applicable credit amount against estate tax to be based on a basic exclusion amount of $9 million (Treas. Reg. Sec. 20.2010-1(c)(2)).

The final regulations also include examples illustrating how the deceased spousal unused exclusion (DSUE) amount is calculated under the so-called “clawback” (recovery of previous exclusion) rules. The regulations confirm that the reference to “basic exclusion amount (BEA)” in Sec. 2010(c)(4), defining DSUE as the lesser of the BEA or the unused portion of the spouse’s applicable exclusion amount, is a reference to the BEA in effect at the time of the deceased spouse’s death, rather than the BEA in effect when the surviving spouse dies. This ensures that a DSUE amount elected during the increased BEA period will not be reduced when the increased BEA sunsets.

Go Big, or Do Not Bother

For clients who have decided to take advantage of the expanded exclusion amount, the value of the gifts must be substantial to make best use of this unique opportunity. Because prior use of the exclusion amount reduces a taxpayer’s exclusion amount available to offset future gifts, gifting less than $6.4 million does not maximize the current gifting opportunity, see the table below.

** The exclusion amount will not go below zero, provided the exclusion amount exceeds the gift value at the time of gifting.

It is important to note that if the exclusion amount is reduced in the future, making gifts now will not increase the donor’s future taxable estate. This is because the Internal Revenue Service issued regulations in 2019 that eliminate the risk of an increased taxable estate resulting solely from a decrease in the exclusion amount

In summary, the anti-clawback final regulations allow taxpayers to consider significant lifetime gifts with more confidence. Therefore, we are recommending to all advisors to advise their wealthier clients to gift now to preserve their larger $11.58 million estate exclusion amount through this temporary gifting opportunity.

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