On November 20, 2018, the IRS issued proposed regulations which further clarified the taxation of past and future gifts under the new tax law. It provides guidance on how gifts will be treated in the future and how the tax will be mathematically calculated to avoid unfair results.
As a reminder, the new tax law passed on December 20, 2017. It raised the lifetime estate/gift tax exemption from $5.45 million to $11.18 million for a single individual ($10.9 million to $22.36 million for a married couple electing to split their gifts.)
The Pros and Cons of New Gifting Regulations
The good news is that this means that each of us can pass this amount of money to our children or other chosen beneficiary free and clear of federal gift, estate and generation skipping taxes.
The bad news (aside from the fact that you may not have $11 million dollars to pass on!) is that this amount is set to revert to the lower amounts starting January 1, 2026.
The fact that this amount keeps changing has some of us in the estate planning world a bit concerned; would gifts made while the number is at the higher level still be subject to tax? Especially under a complicated five-step calculation that considers all previous gifts at different levels in place when the previous gifts were made? It is complicated but under the prior wording of the law (before these proposed regulations) there were several situations where we would see tax on prior gifts in the future that were not subject to tax when made (a concept referred to as “clawback” that is a nightmare to planners!)
These proposed regulations are not yet law as they have not been finalized, but they promote what was the intended outlook of the increase in lifetime exemption. This is meant to encourage transfer of assets without incurring transfer taxes.
Please consult a tax and estate planning expert advisor to see how the new laws apply to your specific facts and circumstances in order to minimize the estate tax your family will owe in the future and thereby maximize the assets you transfer to your family and favorite charitable causes. You can also reference our previous article on estate planning for more information.