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US Ends Estate, Gift Tax Uncertainties

Tom Burroughes

2 December 2019

US citizens who gift up to their available tax transfer exemption limit of $11.58 million between 2018 and 2025 will not face the risks of a clawback if policymakers cut the ceiling in future.

The US Internal Revenue Service has issued final regulations on the matter, and they are a “relief for many individual taxpayers contemplating the use of the increased exclusion amount, although the US estate and gift tax landscape remains subject to change due to potential political developments over the coming years”, Baker McKenzie, the law firm, said in a recent guidance note.

The changes come when gifting and estate tax planning is on the agenda at this time of the year, often with a focus on philanthropy. Also, with a presidential election now less than a year away, high net worth and ultra-HNW individuals are mindful of how tax exemptions could be squeezed if the Democrats take the White House. Rhetoric about making “the rich” pay their “fair share” has been a staple of campaigns in recent months.

The Tax Cuts and Jobs Act of 2017, signed by the Donald Trump administration, doubled the baseline for gift and estate tax exclusion amounts from $5 million to $10 million, which is adjusted annually for inflation effective January 1, 2017. The inflation-adjusted exclusion amount was $11.4 million in 2019 and will be $11.58 million in 2020. This exemption allows taxpayers to transfer up to this amount during life, or at death, without triggering gift tax or estate tax. 

Assuming that laws are not adjusted, the federal exclusion amount is scheduled to revert to $5 million on January 1, 2026. 

“Depending upon the political climate in the United States, there is also the possibility that the exclusion amount could be further reduced to much lower levels, such as pre-2010 exclusion amounts of $3.5 million or even lower,” the law firm said.

“It is important to note that the exclusion amount applies only to US citizens and US domiciliaries for estate and gift tax purposes. Absent an applicable estate and gift tax treaty, there is generally no available exemption for lifetime transfers by non-US domiciliaries. In addition, a reduced estate tax exemption of only $60,000 applies to non-US domiciliaries, it said. 

There had been uncertainty about whether gifts that were originally exempted from gift tax because of the increased exclusion would be clawed back into the taxpayer's estate if the taxpayer passed away in a later year when the exclusion amount had been reduced, it said. The latest IRS regulations are designed to end those worries.

“Taxpayers that intend to make large gifts should consider doing so soon , if they have not done so already, due to the use it or lose it nature of the increased exemption and particularly in light of the political uncertainty in the United States between now and 2026,” the firm said, adding that non-US domiciliaries should also consider how they might be affected.