The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, increased the life-time exclusion amount of transfers subject to Estate/Gift tax from $5 million to $10 million. Adjusted for inflation, this amount is $11.4 million in 2019. The TCJA also provides that this higher amount will revert to its pre-TCJA amount after 2025.
The IRS has now issued TCJA final regulations to address concerns that an estate tax could apply to gifts exempt from gift tax by the increased TCJA amounts in excess of the historic exclusion amount.
The final regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the TCJA exclusion amount or the or the pre-TCJA amount applicable on the date of death with respect to gifts made during the decedent’s lifetime.
For example, ‘Individual A’ made cumulative taxable gifts of $9 million, all of which were sheltered from gift tax by the TCJA exclusion amount allowable on the dates of the gifts. The basic exclusion amount on A’s date of death is $6.8 million. (The amount in effect after 2025 when the TCJA amount has reverted to the pre-TCJA amount.)
Because the total of the amounts allowable as a credit in computing the gift tax payable on A’s life-time gifts (based on the $9 million TCJA exclusion amount used to determine those credits) exceeds the credit based on the $6.8 million post-TCJA 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.
In simple terms, individuals may make gifts on the assumption that the benefits of the higher TCJA exclusion amount will not be lost after this amount is reduced after 2025.