This is the first part in our multi-part series.

The 2017 Tax Cuts and Jobs Act doubled the gift and estate tax exclusion amount—i.e., the amount that can either be excluded from your estate when determining if your estate will owe any taxes when you pass away or the amount you can gift to individuals during your lifetime without owing any taxes—which had previously been $5 million (adjusted each year for inflation) per individual. The exclusion amount for 2020, including the adjustment for inflation, is $11.58 million. However, the increase in the exclusion amount is temporary and, unless Congress extends it, will expire on December 31, 2025.

This has caused concern that if taxpayers made gifts of the additional $5 million (adjusted for inflation) between January 1, 2018 and December 31, 2025, the benefit could be “clawed back” in the calculation of their estate taxes if they died on or after January 1, 2026—i.e., after the expiration of the increased exclusion amount.

This concern arose because gift and estate taxes are calculated together, as a unified calculation. The determination of whether any tax is due is made by applying a credit based on the basic exclusion amount. The credit is first applied against the gift tax, and to the extent that any credit remains at death, it is applied against the estate tax.

Some worried that if the exclusion amount at death is lower than the amount of the exclusion when lifetime gifts were made, this could create a difficult situation in which tax could be due at death, but no money would be left to pay it, because it had been given away during the taxpayer’s lifetime.

Special Rule
In November 2019, the Internal Revenue Service (IRS) released final regulations providing that taxpayers who take advantage of the higher gift and tax exemption available between 2018 and 2025 will not lose the tax benefit of the higher exclusion amount upon their subsequent death on or after January 1, 2026, when the exclusion amount is set to decrease to the pre-tax reform level. Instead, the new IRS regulations adopt a special rule allowing an estate to compute its estate tax credit using the greater of the exclusion amount applicable to gifts made during an individual’s lifetime or the exclusion applicable on the date of death.

We Are Here to Help
Let us help you take advantage of the significant tax savings provided by the increased gift and estate tax exclusion amount during the current window of opportunity. We look forward to working with you to create the most advantageous estate plans for you and your family, designed with your unique circumstances in mind. At Marvel Law, we are here to help serve you with purpose.  Click here to email us or call us at 309-807-2885 for your FREE 15-minute consultation.