The Tax Cuts & Jobs Act of December 2017 doubled the lifetime exclusions under the Gift and Estate tax to $11.4 Million (adjusted for inflation) in 2019. An individual’s estate comprises of the total net value of his assets. According to Gift Tax rules, the first $11.40 Million would be free (For 2019 – this exclusion is subject to inflation adjustment every year). Any amount remaining after this is taxable at the rate of 40%.
The TCJA also states that this increased exclusion limit will revert to the pre TCJA limit in 2025. In other words, in 2025 the exclusion limit will be back to the pre TCJA levels, of course, adjusted for inflation. This change is likely to cause some issues – for example, how would you treat a gift made based on the TCJA limits if the individual who makes the gift is deceased after 2025 (when the pre-TCJA limits will be restored). In such a situation, what estate tax exclusion limits are to be used by the Estate of the deceased individual?
Let us assume that an individual made cumulative gifts of say $8 Million. At the time of the taxpayer’s death, an estate tax return is to be filed and at that time the exclusion limit becomes say $6.8 Million – having reverted to pre-TCJA levels. In this situation, the gifts exceed the exclusion limit. However, at the time the gift was made, the taxpayer was well within his rights in having made the gift based on the exclusion limits applicable at that time. In order to resolve this anomaly, the final TCJA regulations state that the Estate Tax return of the deceased taxpayer may make use of the higher applicable credit amount i.e. $8 Million.
While the estate tax exclusion limits will revert to pre TCJA levels in 2025, taxpayers may make use of higher allowed exclusion limits until then. After 2025, they would still be able to use the higher exclusion limits on the Estate Tax return. The final TCJA regulations have thus removed an anomaly in the use of the lifetime exclusion limits on the estate.