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When the gift and estate tax exclusion amount was increased under the 2017 Tax Cuts and Jobs Act, taxpayers and their advisors questioned what would happen if large lifetime gifts were made during the years of the increased exemption amount (2018–2025) and death occurred after the gift and estate tax exclusion amount reverted to lower levels (2026 and beyond) (commonly referred to as the “clawback” question).

Gift & Estate Tax Exemption

In November 2019, the IRS published final regulations that provided guidance needed for taxpayers to make fully informed tax decisions about lifetime gifts. The following Q&A address how the regulations affect gift and estate tax calculations.

Who is impacted by the final anti-clawback regulations?

Individuals who make lifetime gifts after 2017 and die after 2025.

What are the estate tax consequences if an individual gifts the full exclusion amount by December 31, 2025?

The anti-clawback regulations clarify that in the case of a donor who makes lifetime gifts when the increased exclusion amount is in effect and dies after 2025 when the increased exclusion amount reverts to the 2017 level of $5 million indexed for inflation, the decedent’s estate will not claw back the excess.

In other words, if an individual makes an $11.58 million gift in 2020 and dies in 2026, the exclusion used in calculating the unified gift and estate tax for estate tax purposes will be $11.58 million, not $5 million, adjusted for inflation.

What are the estate tax consequences if an individual gifts a partial exclusion amount by December 31, 2025?

If an individual makes a lifetime gift that is less than the full increased exemption amount but greater than the exclusion amount in effect at death, there will be no recapture of the increased exclusion benefit.

For example, if an individual makes a gift of $8 million in 2020 and dies after 2025 when the exclusion amount has reverted to $5 million adjusted for inflation, the individual’s estate will get the benefit of the estate tax exclusion of $8 million, not $5 million, adjusted for inflation.

What are the estate tax consequences if an individual does not gift either a full or partial exclusion amount greater than the exclusion amount in effect at death by December 31, 2025?

If an individual makes a lifetime gift that is less than the exclusion amount in effect at death, there will be no additional benefit.

For example, if an individual makes a gift of $3 million in 2020 and dies after 2025 when the exclusion amount has reverted to $5 million adjusted for inflation, the individual’s estate will get only the benefit of the $5 million exclusion adjusted for inflation.

As demonstrated above, the increased exclusion amount, adjusted for inflation, is a “use it or lose it” benefit and is available to a decedent who survives the increased exclusion period only to the extent the decedent used it by making lifetime gifts during the increased exclusion period that exceeded the exemption amount available at date of death.

How does the new guidance affect the portability exception?

There is one exception to the rule for married couples. The final regulations also clarified that for spouses who elected portability during this increased exemption time, the full increased exemption amount for the first-to-die spouse will increase the exclusion available to the surviving spouse.

For example, if the first spouse dies in 2020 when the basic exclusion amount is $11.58 million and the surviving spouse elected portability, when the surviving spouse dies after 2025, he or she will have his or her available exclusion ($5 million indexed for inflation) and the first-to-die spouse’s exclusion amount ($11.58 million) to offset estate taxes.

Is there final guidance about the clawback of allocated generation-skipping exclusion amounts?

The November regulations did not provide final guidance as to whether the sunset of the increased exemption amount for generation-skipping purposes will impact allocations of generation-skipping exemptions made during this increased exemption period. The IRS ducked and stated that a final ruling on that matter is beyond the scope of the regulations.If you are interested in learning more about lifetime gifting opportunities, please contact your Cerity Partners advisor to review your financial situation.


Cerity Partners LLC (“Cerity Partners” is an SEC-registered investment adviser with offices in California, Colorado, Illinois, Massachusetts, Michigan, New York, Ohio and Texas. Registration of an Investment Advisor does not imply any level of skill or training. The foregoing is limited to general information about Cerity Partners’ services, which may not be suitable for everyone. You should not construe the information contained herein as personalized investment, tax, or legal advice. There is no guarantee that the views and opinions expressed in this brochure will come to pass. Before making any decision or taking any action that may affect your finances or your company’s finances, you should consult a qualified professional adviser. The information presented is subject to change without notice and is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees and services, send for our disclosure statement as set forth on Form CRS and ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money.


Meet the Author

Judith Gordon

Principal

Judy is a Principal based in the Silicon Valley office. She provides consulting advice for private clients and advisors on estate planning, wealth-transfer strategies, d trust and estate administration, and charitable planning. With her extensive law background, Judy works collaboratively with clients and their tax advisors and estate planning attorneys to ensure that their strategies are consistent with their overall financial and estate plans and to manage, preserve, and grow their wealth for their family and philanthropic goals.

Prior to joining Cerity Partners, Judy worked as an Estate Planning Advisor at B|O|S and served as a member of the Financial Planning Team. In this role, Judy helped clients navigate significant life changes, minimize their tax burden, and identify goals and strategies for legacy planning. Prior to joining B|O|S, she enjoyed a 35-year legal career in sophisticated gift and  estate tax planning, charitable planning, and probate and trust administration.

Judy earned her Bachelor of Arts in Psychology from the University of Florida and her Juris Doctor degree from Georgetown University. She also received her Master of Laws from New York University.

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