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ALERT: New Regulations Issued on Taxable gifts Made Between 2018 and 2025

January 2, 2019

The passage of the 2017 Tax Cut and Job Acts bill has given high-net worth individuals an opportunity to shelter transfers of gifts or estates with a higher value from the federal gift and estate tax than they could in 2017. Prior to January 1, 2018, an individual was able to transfer estates or make gifts valued up to $5 million ($5.49 million adjusted for inflation) before those transfers were subjected to federal gift and estate taxes. That $5 million exclusion amount doubles for tax years from 2018 through 2025. The exact exclusion amount is affected by the Basic Exclusion Amount (BEA), which is adjusted annually for inflation. The exclusion amount for 2018 was $11.18 million adjusted for inflation and it will increase to $11.4 million in 2019.

The doubling of the exclusion amount for transfers of gifts and estates will sunset in 2025, meaning that the exclusion amount in 2026 will revert to the pre-2018 level of $5 million adjusted for inflation. Questions have been raised by commenters regarding the temporary nature of the exclusion increase, and the possibility that those who make gifts and transfers under the increase may lose out on those benefits if they die after 2025.  This is due to the fact that, in calculating the amount of the federal estate tax, prior taxable gifts are added to the decedent's taxable estate in determining the amount of the estate tax.

On November 23, 2018, the IRS provided a special rule to address those concerns. This special rule allows an estate to compute the estate tax credit using the greater of the BEA applicable to gifts made during life, or the BEA applicable on the date of the individual’s death. The choice of which BEA to apply will allow those who made gifts during  the 2018 -2025 calendar years to not lose the advantage of those doubled BEA exclusions.

To illustrate, assume individual X gives a taxable gift of $8 million dollars in 2018, when the BEA is $11.18 million. X uses $8 million of the available BEA to reduce the gift tax to $0. If X dies in 2027, X’s estate can still base its estate tax calculation on the higher $8 million BEA used in 2018, even though the BEA would be lower in 2027.

If you have any questions on the impact this new regulation may have on your own estate, or wish to discuss your estate plan please contact the head of our Estate and Trust Department Gary Zlotnick at Zachary Orenstein, an associate at the firm, assisted in the preparation of this report.

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