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While separated, death and taxes are widely accepted as the only certainties in life. Combined, they give a lot of people anything but certainty. The death tax – or as it is formally known, the estate tax – has been the source of increased contention following the Tax Cuts and Jobs Act (“TCJA”) temporary increase of the lifetime exclusion amount. Very basically, the estate tax requires individuals who have a vast estate after death to pay an additional tax on their wealth before it’s distributed to heirs and assignees.
The estate tax is only one of a few different taxes put in place to curtail dynastic transfers of wealth before and after death. There’s also the gift tax, which coupled with the estate tax is part of a unified schedule that determines a taxpayer’s liability for wealth given away through gifts during life and bequests after death. Every taxpayer has a lifetime exclusion amount that protects assets up to a specified dollar from being subject to gift or estate taxes.
Now about that uncertainty mentioned above. In 2017, Congress passed the TCJA which, among other things, temporarily doubled the estate tax exclusion amount to $11.2 million per individual. That amount will drop back down to its pre-TCJA level of $5.6 million in 2026 (both adjusted for inflation annually). For those that die between 2018 and 2025, the ephemeral nature of the increase will not cause their estate any trouble, but unfortunately, for taxpayers not gifted with precognition and/or healthy enough to likely live past the next six years, a glaring problem arises. What if a taxpayer gifts $11 million during his/her lifetime and dies in 2027? Will the amount gifted in excess of the exemption amount ($5.6 million adjusted for inflation) be recaptured and taxed upon death?
Fortunately, the IRS has recognized this conundrum and given taxpayers a reprieve. In November, the agency finalized its proposed regulations amending Reg. 20.2010-1 to conform with the increases to the exemption amount post-sunset. Specifically, where estate tax would be due as a result of the taxpayer using his or her lifetime exemption, the exemption is effectively increased on the estate tax return to remove the tax, providing gift-minded taxpayers peace of mind and offering joy to many potential recipients and donees alike, just in time for the holidays.
If you would like more information on these matters, contact Schneider Downs to schedule an appointment with one of our many tax professionals.