The Tax Cuts and Jobs Act (the act), effective Jan. 1, 2018, increased the basic exclusion amount for federal estate and gift tax purposes from $5 million, indexed for inflation, to $10 million, similarly indexed. As applied to transfers occurring in 2019, the practical impact has been to increase the basic exclusion amount from $5.7 million to $11.4 million. These facts are widely known. Somewhat less known is the fact that this increase sunsets at the end of 2025, and that the exclusion will automatically return at that time to the figure it would have been prior to the act. The combination of the substantial exclusion increase and scheduled rollback has given rise to a number of practical concerns involving the interplay of gifts made prior to the increase, during the increase period, following the rollback and at death.

Of particular concern to tax practitioners has been the question: will gifts that a taxpayer makes after 2017 and before 2026 to take advantage of the extra exclusion amount effectively be subject to transfer tax a second time if the taxpayer dies after the exclusion amount reverts back? A strict reading of the Internal Revenue Code would suggest that the answer is “Yes.” Fortunately, the professionals in the Treasury Department have proposed a remedy. This remedy is embodied in a proposed ruling published by the Internal Revenue Service on Nov. 23, 2018. In  taxpayer-friendly language, the IRS basically says in its ruling that: a taxpayer’s gift will be taxed only once based on the law in effect when the gift is completed and his basic exclusion amount will be adjusted as necessary to ensure that the same property will not be taxed again in the taxpayer’s estate.

A Brief Review of the Federal Estate and Gift Tax Exclusions