Proposed Regulations Seek to Clarify Estate Inclusion and Clawback for Certain Lifetime Gifts

May 3, 2022

When the Tax Cuts and Jobs Act was passed in 2017, it doubled the unified gift and estate tax exemption temporarily through 2025. Knowing the higher exemption was not permanent, a key question was “what would the impact be to my estate when the unified tax credit reverts to the lower exemption amount after 2025.” In other words, would prior gifts that exceed the future lower exemption be “clawed back” into an estate and subject to estate tax at death?

In November 2019, the IRS formally clarified their position through final regulations. The IRS issued a special rule that individuals using the increased gift tax exclusion amount from 2018 to 2025 would not have to "claw back" any gifts after the exemption drops to pre-2018 levels.

However, the preamble to the 2019 final regulations stated that further consideration would be given to the issue of whether gifts that are not true inter-vivos transfers, but instead are includible in the decedent’s gross estate, should be excepted from the special no-clawback rule, and that any proposal addressing this issue would benefit from notice and comment.

Fast forward to 2022. On April 26, proposed regulations were issued to address the question the IRS left unanswered in 2019. The proposed regulations provide that "gifts" of property includible in the donor’s gross estate after 2026 would be subject to estate tax based on the values, estate tax rates, and exemptions applicable as of the date of death. The estate tax rules bring gifts back into the taxable estate under some limited and specified circumstances. 

Watch for an upcoming Insight article with more information and stay tuned for future updates on the proposed regulations.

Related: Estate and Gift Tax—Are You Prepared for Changes?

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