Estate and Gift Tax Update: No Clawback After Increased Transfer Limit Expires
The Tax Cuts and Jobs Act of 2017 (“TCJA”) increased the lifetime estate and gift tax amount that may be transferred free from $5 million to $10 million per taxpayer, indexed for inflation. This increased exemption applies to transfers made between January 1, 2018 and December 31, 2025. On January 1, 2026, the lifetime exemption reverts to $5 million.
The IRS recently announced that the 2019 inflation adjusted exemption amount is $11.4 million, which allows a married couple to shield $22.8 million from transfer tax.
Because the increased tax exemption was temporary, there was uncertainty whether gifts exceeding $5 million made under these provisions would be clawed back into the estates of decedents dying after the 2025 expiration of the increased exemption amount. In other words, if you made a $10 million gift in 2025 and died in 2027 when the exemption is $5 million, would your estate owe tax on the $5 million excess?
On November 25, 2018, the IRS answered this question with the issuance of proposed regulations, which indicate that gifts made before January 1, 2026, will not be clawed back to the estates of decedents dying after December 31, 2025. The issuance of these proposed regulations strengthens a tremendous opportunity for the tax-free transfer of wealth, including ownership interests in closely held businesses.
Gifting closely held business interests
For those considering gifting closely held business interests, the process is more complicated than gifting assets such as marketable securities, the fair market value of which is readily determinable. To gift a business ownership interest, a valuation of the business and the gifted interest must be performed by a qualified business appraiser. Although 2025 is distant, those who wait until the last minute may encounter problems obtaining the required business valuation. You may recall 2016, when the IRS proposed rules eliminating valuation discounts in estate and gift valuations. There was a mad rush to get valuation reports completed, with limited capacity to complete this work.
We’ve got your back
If you have a large estate, this is a tremendous opportunity to save transfer taxes, which get to a 40% tax rate very quickly. If your estate includes a closely held business, you would benefit by starting the process sooner rather than later. Once this opportunity is gone, it will be gone for good. Contact your advisors today to get the process going.