IRS Confirms: No “Claw-Back”

Ever since the 2017 Tax Cuts and Jobs Act (“TCJA”) doubled the federal estate tax exemption amounts (adjusted for inflation to $11.58 million for 2020), estate taxes have been a thing of the past for most individuals. Some high net-worth individuals, however, have kept in mind that the TCJA is set to “sunset” on December 31, 2025, at which point the estate tax exemption amount will revert back to amount in effect in 2017 ($5 million, as adjusted for inflation). Those individuals have therefore questioned whether it is possible to utilize a portion of the presently available exemption amount by making taxable lifetime gifts, or whether the IRS would later “claw back” the temporarily increased exemption amount by reducing a taxpayer’s available estate tax exemption by the cumulative total of the gifts made by the taxpayer while the TCJA was in effect.

On November 22, 2019, the Internal Revenue Service issued final “anti-claw-back” regulations in the form of Treasury Decision 9884. This decision provides that an estate may compute the applicable estate tax credit using either the exemption amount applicable during the decedent’s lifetime or the exemption amount applicable on the date of the decedent’s death, whichever is greater.

26 CFR § 20.2010-1 provides the following example (edited for simplicity):

Individual A (never married) made cumulative taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative total of $11.4 million in basic exclusion amount allowable on the dates of the gifts. The basic exclusion amount on A’s date of death is $6.8 million. Because the total of the amounts allowable as a credit in computing the gift tax payable on A’s gifts (based on the $9 million of basic exclusion amount used to determine those credits) exceeds the credit based on the $6.8 million basic exclusion amount allowable on A’s date of death, the credit for purposes of computing A’s estate tax is based on a basic exclusion amount of $9 million, the amount used to determine the credits allowable in computing the gift tax payable on A’s gifts.

If you have any questions on this topic, please contact Lin Law LLC at (920) 393-1190.