On November 26, 2019, the Treasury Department and the IRS issued final regulations adopting the regulations that were proposed in November of 2018 (83 Fed. Reg. 59343 (Nov. 23, 2018)), effectively ensuring that if a decedent uses the increased basic exclusion amount for gifts made while the Tax Cuts and Jobs Act (TCJA) is in effect and dies after the sunset of the TCJA (currently scheduled for Jan. 1, 2026), the decedent won’t be treated on his or her estate tax return as having made adjusted taxable gifts in excess of his or her basic lifetime exclusion amount (Treasury Decision 9884).
Specifically, the final regulations confirm that in calculating a decedent’s federal estate tax due, the basic exclusion amount used in the computation will be the greater of the federal exclusion amount in effect at the decedent’s date of death or the total amount of gifts previously excluded from tax due to the use of the exclusion amount in place at the time of the transfer (Regs. Sec. 20.2010-1(c)).
For example, if an unmarried individual made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million (indexed) in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025 when the basic exclusion has reverted back to $5 million (indexed), the applicable credit amount against estate tax will be based on a basic exclusion amount of $9 million.
The final regulations also reinforce the notion of a “use it or lose it” benefit and direct that a taxpayer who uses exemption is deemed to utilize the base $5 million (indexed) exemption first and then the additional amount of exemption available through 2025. For individuals dying after 2025, if no gifts were made between 2018 and 2025 in excess of the basic federal exclusion amount in effect at the time of death, the additional exclusion amount is no longer available.
In addition, the final regulations address portability and provide guidance with respect to how the deceased spousal unused exclusion (DSUE) amount is calculated under the new clawback rules. The final regulations confirm that the reference to “basic exclusion amount” in Sec. 2010(c)(4), defining DSUE as the lesser of the basic exclusion amount or the unused portion of the deceased spouse’s applicable exclusion amount, is a reference to the basic exclusion amount in effect at the time of the deceased spouse’s death, rather than the basic exclusion in effect when the surviving spouse dies. As a result, the DSUE amount elected during the increased basic exclusion period will not be reduced when the sunset provisions become effective after 2025.
For example, an individual’s spouse died prior to 2026 at a time when the basic exclusion amount was $11.4 million. The deceased spouse made no taxable gifts and did not have a federally taxable estate, and the spouse’s personal representative makes a portability election to allow the surviving spouse to take into account the deceased spouse’s $11.4 million DSUE amount. At the time of the surviving spouse’s death, the surviving spouse had made no taxable gifts, had not remarried and the basic exclusion amount was $6.8 million. The credit to be applied for purposes of computing the surviving spouse’s estate tax is based on the surviving spouse’s $18.2 million applicable exclusion amount, consisting of the $6.8 million basic exclusion amount on the surviving spouse’s date of death plus the $11.4 million DSUE amount, subject to the limitation of section 2010(d).
The final regulations do not directly address generation skipping transfer tax (GST) issues, as the IRS noted that the effect of the increased basic exclusion on the GST tax is beyond the scope of the regulatory project. The IRS does state, however, in the preamble to the final regulations that “There is nothing in the statute that would indicate that the sunset of the increased [basic exclusion amount] would have any impact on allocations of the GST exemption available during the increased [basic exclusion amount] period.”