The Tax Cuts and Jobs Act of 2017 effectively doubled the lifetime exemption of assets that can be protected from federal estate and gift taxes. For 2018, assets of up to $11.18 million for an individual and $22.36 million for a married couple can be transferred without triggering the estate and gift tax. Those limits are indexed for inflation and will increase to $11.4 million for individuals and $22.8 million for married couples for the 2019 tax year.

However, there is a sunset provision in the law that will see these limits revert to their previous, lower thresholds ($5 million and $10 million) after 2025. Which raises the question: Once the limits revert, will the IRS use a “clawback” to attempt to collect taxes on gifts made under the higher exemption levels?

For example, if an individual taxpayer gifted $11 million in 2018 and then died after the exemption levels reverted to $5 million, would the lower threshold be applied and the estate be taxed on the “extra” $6 million that was gifted?

In an attempt to clarify the situation, the IRS issued proposed regulations in November 2018 that stated the estate tax credit would be based on the greater of the amount of the credit in place at the time of the gift or the credit amount at the time of death. So, in our example the taxpayer would not be subject to additional estate taxes because the higher credit at the time of the gift would apply, and not the reduced credit in effect when they died.

This special rule offers a degree of certitude for those making gifts and transferring assets under the current, higher exemption limits.

If you have questions about estate and gift taxes, or any other tax issue, please contact our Tax Department at (781) 407-0300.