Tax Updates from Washington (February 2019)

Increased exemptions for 2019. The IRS has announced that the gift and estate exemption has increased to $11.4 million per person in 2019. The exemption amount in 2018 was $11.18 million. This means that in 2019, an individual can make gifts during life or at death totaling $11.4 million without incurring gift or estate tax. In addition, a married couple can now transfer $22.8 million worth of assets during life or at death tax-free. The annual gift tax exclusion amount remains at $15,000 per recipient ($30,000 if spouses elect gift-splitting).

IRS addresses estate and gift tax exemption “clawback.” The Tax Cuts and Jobs Act (“TCJA”), which was signed into law in December 2017, increased the gift and estate tax exemption from $5 million to $10 million, indexed for inflation (see current rates above). The TCJA also provides that the exemption amount will revert to $5 million in 2026. This led many practitioners to wonder: what happens if an individual makes a gift in excess of $5 million now, and dies in or after 2026 when the exemption amount is only $5 million? Because the gift and estate tax exemption is unified, this could mean that estate tax would be due since the individual’s gross estate, which includes the prior gift made, would exceed the applicable exemption at the time of death.

However, in November 2018, the Treasury issued proposed Regulations addressing this “clawback” of the exemption amount (Prop. Reg. Sec. 20.2010-1(c)). The Regulations provide that in the situation described above, the applicable estate tax credit will be based on the greater of the two amounts. For example, if an individual makes a gift of $9 million in 2019 when the exemption amount is $11.4 million and then dies in 2026 when the exemption is $5 million, the individual’s estate may use the higher exemption of $11.4 million to ensure that tax will not be due on the amount in excess of $5 million. Thus, if you are considering make a large gift (or a series of gifts), now is the time to do it, when the exemption amount is the greatest it has ever been.