Planning to Implement a Significant Gifting Strategy before 2026?

Final Regulations Provide Guidance but the Window of Opportunity Could End “Sooner Rather Than Later”

The Treasury Department and the Internal Revenue Service provided individuals and their estate planning advisors with a timely gift for the recent holiday season. In what amounts to another “use it or lose it” tax planning consideration, final regulations were recently issued for individuals who wish to avail themselves of the higher gift and estate tax exclusion amounts in effect from 2018 to 2025. The final regulations come as welcome relief to individuals who had concerns about their post 2017 gifts being subject to “clawback” type treatment after 2025.

Why was the clawback threat so concerning and why are the final regulations so welcomed? The larger gift and estate tax exclusions permitted by the Tax Cuts and Jobs Act of 2017 (TCJA) legislation provide ultra-affluent individuals an opportunity to make larger tax-free gifts during their lifetime. The final regulations now allow individuals to continue making these gifts without fear of having the gifts be pulled back into their estate at death. To the extent individuals do not use their exclusion amount for gifts made during life, the exclusion amount is available to their estate at death. But here’s the catch … the larger gift and estate tax exclusions are only available through the end of 2025. (Note: subsequent presidential administration and/or congressional party changes may shorten the timetable available to use the larger TCJA gift and estate tax exclusion amounts – more on that later.) Regardless, beginning in 2026, the gift and estate tax exclusion amounts revert back to the smaller (pre-TCJA tax law) exclusion amounts.

The following summary may provide a better understanding of the final regulations and assist with future planning as it pertains to gift and estate tax exclusion decision-making considerations before 2026:

  • The Tax Cuts and Jobs Act of 2017 temporarily increased the gift and estate tax exclusion amounts for years 2018 through 2025.
  • Beginning in 2018, the gift and estate tax exclusion amounts were initially increased from $5 million to $10 million and then adjusted for inflation. During the TCJA period, these amounts will continue to be adjusted for inflation. (For example, the 2020 gift and estate tax exclusion amount is now at $11.58 million.)
  • Individuals can utilize their exclusion amount for gifts made while alive or have it be available for application against estate assets at death.
  • The IRS issued proposed regulations in November 2018 to provide initial guidance for the TCJA period (2018-2025) regarding the larger gift and estate tax exclusion amounts.
  • Although the proposed regulations addressed gifts made using the (initial) larger exclusion amounts, there was still concern that gifts made utilizing the larger “inflation-adjusted” exclusion amounts might be disregarded after 2025.
  • The recently issued final regulations provide confirmation to individuals that gifts made during the 2018-2025 TCJA period will avoid any future clawback of the larger (inflation-adjusted) exclusion amounts.
  • The final regulations also include four examples to help illustrate how the TCJA gift and estate tax exclusion amount (2018-2025) is to be reported by decedent estates after 2025.

Finally, it was previously mentioned how the time frame (for utilizing the larger, inflation-adjusted TCJA gift and estate tax exclusion amounts) expires at the end of 2025. However, the 2020 presidential election as well as future congressional elections could result in an abrupt end of the expanded gift and estate tax exclusion amounts. The TCJA of 2017 tax legislation was a Republican-supported initiative. The Democratic party, especially some of the top Democratic presidential contenders, have stated their intention to support legislation that would significantly reduce the gift and estate tax exclusion, well before the expiration of the TCJA period in 2025.

Therefore, the “use it or lose it” period could potentially expire well before 2025. In other words, if a significant gifting strategy is being contemplated, it should be evaluated “sooner rather than later” because “later” might occur much sooner than midnight, December 31, 2025.

If you have questions about this article, please contact your BNN advisor at 800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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