Updated: Aug 28
The Tax Cuts and Jobs Act (“TCJA”) of 2017 brought massive changes to the Estate and Gift Tax. Under the TCJA, the basic exclusion amount almost doubled, from $5 million to $10 million (with both dollar amounts adjusted for inflation), for tax years 2018 through 2025. This means that an individual can currently shield $11.4 million in assets and a couple can currently shield $22.8 million in assets (with some basic portability techniques) from gift and estate tax.
For high net worth individuals, the TCJA created a rare opportunity to take advantage of strategies for “locking in” those exemptions and permanently avoiding future transfer taxes.
But, what happens when TCJA “sunsets” in 2026 and the basic exclusion amount reverts back to $5.6 million (the 2017 level of $5 million as adjusted for inflation). Practitioners have been concerned about the possibility that retroactive taxes could apply to taxpayers/estates that take advantage of the increased exclusion during this period.
We got our answer in the form of IRS Proposed Regulation 106706-18. It clarifies that those who make large gifts that fall under the increased exclusion during the delegated period will remain tax-free and will not be taxed on that amount at any time in the future.
Most practitioners agree that the best course of action if it makes sense for the taxpayer’s overall plan, is to use the exemption for gifts before 2025.