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May 27, 2022
To quote Forrest Gump, estate and gift planning regulations “are like a box of chocolates, you never know what you’re going to get.”
Making sure you are creating the right strategies requires tracking the latest developments that may dramatically affect your wealth.
In April 2022, the IRS issued proposed regulations creating exceptions to the No Claw-Back Rule. This threatens the ability to benefit from the current all-time high estate tax exclusion amounts.
Under current law, anyone can gift up to $12,060,000 to another party without having the amount subject to estate or gift taxes. However, in 2026, that total exemption limit will be reduced to $5 million, adjusted for inflation (that will equate to an exemption amount of about $6 million).
But what happens if you gift someone $12,060,000 prior to 2026 but pass away in 2026 when the exemption amount drops to only $6,000,000? The worry is that more than half of that amount — $6,060,000 – will be subject to estate tax even though the exemption amount in effect at the time of the gift was $12,060,000.
In 2019, the IRS created the No Claw-Back Rule that says the higher exclusion amount will remain in effect if death happens after 2025.
So, if an individual makes a gift of $8 million in 2022 and dies after 2025 when the exclusion amount has reverted to $6 million, their estate will get the full benefit of the estate tax exclusion of $8 million, not the $6 million.
Nothing yet. But the IRS is proposing certain exceptions to the No Claw-Back Rule.
That means certain gifts made under the current $12,060,000 gift and estate tax exemption amount may be subject to the lower estate tax exemption amounts applicable in 2026, so the “excess” amount of the gift could be “clawed-back” into the donor’s estate.
The strategies targeted by the exceptions to the No Claw-Back Rule include:
Two popular strategies that could potentially become (but are not automatically) subject to claw-back under the new proposed regulations are Grantor Retained Annuity Trusts and Qualified Personal Residence Trusts.
Exceptions to the No Claw-Back Rule under the new proposed regulations will not affect stand-alone strategies such as Spousal Lifetime Access Trusts (“SLATs”) and Dynasty Trusts. You can still gift $12,060,000 to these planning vehicles now without fear of a “claw-back” when the estate tax exemption amount is reduced in 2026.Having said that, if SLATs or Dynasty Trusts incorporate promissory notes or other strategies targeted by the exceptions to the No Claw-Back Rule, they could also be (but are not automatically) subject to the reduced exemption amounts in 2026.
No, but it is likely, even if the final version contains slight modifications. Proposed regulations are binding on the IRS but are not binding on taxpayers until the regulations become final. Regardless, it isn’t wise for taxpayers to engage in planning strategies that are prohibited by the proposed regulations because at some point, they may become final.
The proposed regulations are new so more guidance will come as the proposed regulations are further scrutinized and taxpayer comments are evaluated by the IRS.
As these regulations evolve, please know our planning specialists are available to answer any questions you may have. They have extensive experience helping clients implement advanced wealth transfer solutions to achieve their estate planning goals and mitigate taxes.
Contact us today to consult with a Cerity Partners Estate Planning Advisor.
Please read important disclosures here.
Paul oversees Centralized Estate Services for Cerity Partners and is a Partner based out of Denver, Colorado. He works with Cerity Partners’ advisors to review...
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