Posted by LLOYD J CAZES CPA

No Clawback for Huge Wealth Transfer – IRS Confirms

No Clawback for Huge Wealth Transfer – IRS Confirms

Recently, the Internal Revenue Service and the Treasury Department gave their verdict on the gift items and tax exclusion amount that have taken effect from 2018 to 2025. The regulations confirmed that anyone that takes advantage of the estate tax exclusion fee and the gift amount will not be impaired when the exclusion levels drop.

According to the Tax Cuts and Jobs Act of 2017, the gift tax exemption and the estate was doubled. This led to an increase in the base amount to $10 million per individual from $5 million. This is the value a person is permitted to give away tax-free, while not being subjected to the tax rate of 40%. When inflation was taken into consideration, the estate exemption amount was placed at $11.4 million per individual. This increase in the estate tax will, however, reduce in 2025.

A major concern during this period was whether gift items would be subjected to tax when the exemption goes down. Even though the proposed rule tried to address this issue and gave a negative, it is still not sure as there are some concerns. 

Now that the IRS and the Treasury are issuing IR-2019-189, there is a new rule for people that want to take advantage of the gift and tax exclusion amount. While this will be activated from 2018 to 2025, the exclusion amount will drop but will not take effect after 2025. The IRS revealed that people who want to make large wealth transfer can go ahead without fear of losing their tax benefit once the level goes down after 2025.

Benefits for Year-End Tax Planning

What is the implication of this for year-end tax planning? The regulation specifies that there won't be clawback for excessive wealth transfer that was enacted with the Trump tax law. You, however, need to know that this is not that surprising, as the rules were proposed years ago. These final regulations, however, made it certain, removing all doubt. This explains why we encourage you to act now as it comes without worry.

For instance, if we assume that you have $12 million as trust form your heir. If you die in 2026 after a brief sickness, which was a time the estate tax exemption was decreased to $6 million. The estate will not be subjected to any tax on the extra $6 million gifts. According to the IRS, the entire $12 million in this illustration will be forever tax-free based on this new regulation.

Finally, they also took into account many public opinions and comments. There were many illustrations to explain the concept of these calculations. It is pretty complicated as there are many things one needs to understand like the deceased spousal unused exclusion (DSUE), the basic exclusion amount (BEA), and also the generation-skipping transfer (GST).

On a final note, this applies if your gifts and donations are made between 2018 and 2025. This illustration further explains the fact that when you give, there is a provision to take care of inflation which has been applied. 

Bear in mind that it is better to make use of this benefit as you can lose it if you do not need it. 

LLOYD J CAZES CPA
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