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No Clawbacks. The Time to Act is Now!

In 2017, a window was opened. And at the end of 2025, that window will close. This breath of fresh air was granted by the passing of the Tax Cuts and Jobs Act (TCJA) of 2017, which increased the Basic Exclusion Amount (BEA) from $5 million to a new base of $10 million (indexed for inflation after 2011) for gifts and inheritances bestowed from 2017 through the end of 2025. Though there are many motivations for lifetime gift-giving, it is often a strategy to maximize the value of wealth and inheritance while minimizing its subjectivity to taxation as much as possible. An estate tax is technically calculated as a combined value of lifetime gifting and taxable estate, but lifetime gifting also has the added benefit of removing the appreciation of the amount gifted from the value of the estate, so the incremental amount is not subject to the estate’s overall taxation. And of course, there are some gifts that are exempt from taxation altogether, like annual exclusion gifts of $15,000 or less per recipient and direct payments of medical expenses or school tuition. The Tax Cuts and Jobs Act has opened a window of gifting for those looking at federal estate taxes, but this legislation has an expiration date of January 1, 2026, at which time the $10 million bases will revert back to the $5 million base and the ability to take advantage of the increased estate and gift tax exclusions will cease. We are currently in an important opening of opportunity that should not be missed.

What is Clawback, and Should I Worry?

Initially when the Tax Cuts and Jobs Act was passed in 2017, there were questions to the terms, especially regarding “clawbacks,” or compensation recovery provisions meant to deter fraudulent activity. In the instance of estate taxation, the clawback could be the imposition of an estate tax on a previously untaxed gift. With the Act set to expire on Jan 1, 2026, eyebrows were raised when considering what might happen if a taxpayer gifted $10 million before that date, and then passed away after that date, when the BEA reverted back to $5 million. Because gift and estate tax is an aggregated calculation, could the additional $5 million be “clawed back” into an estate tax liability?

After much deliberation, on November 26, 2019, both the United States Treasury Department and the IRS declared final regulations under IR-2019-189, confirming that the terms set by the TCJA of 2017 did not allow “clawback”.  Therefore, if a taxpayer cumulatively gifted up to $10 million prior to 2026, a gift tax would not be due on the additional $5 million. And if an individual transferred $10 million into an irrevocable trust in 2019, and dies after January 1, 2026, the rules stated that the entire $10 million would be exempt from the estate tax, even though the estate and gift tax exclusion had reverted back to the $5 million bases (adjusted for inflation).


Inflation is Significant

Mentioned here a few times is an adjustment for inflation. The final ruling by the United States Treasury Department and the IRS in 2019 also accounted for inflation adjustments. For example, the Base Exclusion Amount of $10 million, has actually grown to a Base Exclusion Amount of $11,580,000 million for gifts bestowed in 2020- a significant difference, especially when considering that a married couple could be gifted a combined $23,160,000.


The Benefit to a Surviving Spouse

And speaking of married couples, although unpleasant to consider, the 2019 regulations also clarified the ruling for a surviving spouse, should their husband or wife pass away prior to 2026. In this determination, with the Base Exclusion Amount increased, any unused exclusion becomes fixed at the time of the first spouse’s death, and cannot be decreased if the surviving spouse lives into 2026, even though their own exclusions will be reduced as their life continues into 2026 and beyond.


You Must Use, or You Could Lose

Most importantly, the November 2019 regulations outline a “use it or lose it” stance, proclaiming that if a taxpayer dies after 2025, and does not gift the full amount of the increased Base Exclusion Amount between 2018 and 2025, they will lose the benefits of the currently expanded exclusions. So, to best protect your estate, you should not miss these favorable circumstances toward gift and estate taxation.

It is critical to note that if the gift-giving is motivated by wanting to take advantage of the gift tax exemptions outlined by the TCJA, the gifting needs to be substantial, so as not to leave money on the table. In order to truly benefit from the temporarily enhanced gift tax exemption, the amount a taxpayer gifts should be at, or very close to, the full Base Exclusion Amount (currently about $11,580,000).


Preserve Your Estate for Future Generations

The Tax Cuts and Jobs Act of 2017 opened the window of opportunity for taxpayers to enjoy gift tax exemptions, and the November 2019 ruling made much-needed clarifications. Since one cannot fully predict further directives that could alter the current regulations or change the timeline of the increased Basic Exclusion Amounts resulting from a potentially changing political landscape, now is really the time to put together a plan and make these laws work for you. You have worked hard throughout your life to build your estate, and you want to keep it as intact as possible to ensure that your loved ones will be well-taken care of. 2025 is around the corner, and that window of enhanced gift and estate tax benefits is on track to be closing soon.


We Will Help

The estate planning attorneys at Lowthorp, Richards, McMillan, Miller & Templeman are here to help you. We know what it takes to successfully plan for the future, and we truly care about what is most important to you. Together, we will evaluate your assets, discuss your goals, and work to prepare, provide, and implement estate planning options that best serve you and your family. If you are interested in taking advantage of the increased gift tax and estate benefits provided by the Tax Cuts and Jobs Act of 2017, let us lead your way. For more information, we invite you to visit our website, or call us at 805-981-8555. When the window of opportunity opens, we will make sure you and your family reap the benefits.





NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Cristian R. Arrieta, Lowthorp Richards McMillan Miller & Templeman, A Professional Corporation, 300 E. Esplanade Drive Suite 850, Oxnard, CA 93036