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Post-2025 Estate Clawback is Gone but Election Concerns Compel Action

Scott T. Ditman, CPA/PFS

1.13.20 | Client Alert

Good news mixes with gathering clouds of uncertainty.  On the positive side, final IRS regulations provide comfort to taxpayers interested in making large gifts under the current gift and estate tax regime. However, the results of the upcoming election could lead to significant — and taxpayer unfriendly — changes to the estate and gift tax laws.

Clawback Fear Abated

The Tax Cuts and Jobs Act (TCJA) temporarily doubled the gift and estate tax exemption from $5 million to $10 million for gifts made or estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026. The exemption is adjusted annually for inflation ($11.58 million for individuals and $23.16 for married couples for 2020). After 2025, though, the exemption is scheduled to drop back to pre-2018 levels.

With the estate tax a flat 40%, the higher threshold for tax-free transfers of wealth would seem to be great news, but some taxpayers became worried about a so-called “clawback” if they die after 2025. Specifically, they wondered if they would lose the tax benefit of the higher exemption amount if they didn’t die before the exemption returned to the lower amount.

The concern was that a taxpayer would make gifts during his or her lifetime based on the higher exemption, only to have their credit calculated based on the amount in effect at the time of death. To address this fear, the final regulations provide a special rule for such circumstances that allows the estate to compute its estate tax credit using the higher of the exemption amount applicable to gifts made during life or the amount applicable on the date of death.


Let’s say that you made $9 million in taxable gifts in 2019, while the exemption amount of $11.40 (the adjusted exemption for 2019) million is in effect. But you die after 2025, when the exemption drops to $6.8 million ($5 million adjusted for inflation).

Under the new regulations, the credit applied to compute the estate tax is based on the $9 million of the $11.4 million exemption used to compute the gift tax credit. In other words, your estate won’t have to pay tax on the $2.2 million in gifts that exceed the exemption amount at death ($9 million less $6.8 million).

If, however, you made taxable gifts of only $4 million, the new regulations won’t apply. The total amounts allowable as a credit when calculating the gift tax ($4 million) is less than the credit based on the $6.8 million exemption amount at death. So, the estate tax credit is based on the exemption amount at death, rather than the amount under the TCJA.

Act Now – You May Have Less Time Than You Think

Even though the TCJA and the final regulations provide a strong tax incentive to transfer assets, it’s important to remember that the offer is “use it or lose it.” The new regs apply only to gifts made during the 2018-2025 period — these numbers are scheduled to revert to half those amounts in 2026.

But you may have even less time to leverage your options. Depending upon the results of the 2020 election, the gift and estate tax exemption could be reduced even further, and the tax rate steeply increased.

As a result, high net worth individuals may have a limited opportunity to make significant lifetime gifts.  These gifts would remove the assets from their estates, as well as post-transfer income and appreciation attributable to those assets. With this in mind, the increased exemption amount may be used now to make direct gifts of cash or securities to family members.

Alternatively, in today’s low interest rate environment, the following techniques should also be considered:

Gifts/Sales to Intentionally Defective Grantor Trusts (IDGTs)/Generation-Skipping Trusts (GSTs): By making a complete sale, complete gift, or a combination of both to an IDGT/Generation-Skipping Trust, the grantor will still pay the income tax on the income generated by the trust, including capital gains tax. However, this will allow the property sold and/or gifted to the trust to grow for the beneficiaries outside of the grantor’s estate and unencumbered by income tax. Further, through the allocation of the grantor’s unused GST tax exemption to the trust, an amount up to that exemption may benefit several generations of the grantor transfer tax free.

Grantor Retained Annuity Trust (GRAT). The grantor transfers assets to a trust for a term of years and receives an annual annuity. GRATS are typically structured so that virtually no taxable gift is incurred at creation. If the grantor survives the term, the assets pass to the beneficiaries virtually estate and gift tax free. The annual annuity the grantor receives is based on the Section 7520 rate. The lower the 7520 rate, the less the grantor is required to receive. This means the more the trust earns and appreciates, the more that passes to the beneficiaries.

Other estate planning strategies to consider include Intra-Family Loans,  and the Use of Life Insurance to address estate liquidity needs.

Should you have questions about how to plan and structure your gifting and overall estate planning to achieve the maximum tax benefits, contact Scott Ditman at 212.331.7464 | SDitman@BerdonLLP.com or your Berdon advisor.

Berdon LLP New York Accountants