The Estate and Gift Tax Exemption Planning Puzzle

As every good tax advisor knows, planning is key. So what happens when you have to plan for the unknown? This is the situation that estate and gift tax planners are currently facing in response to the Tax Cut and Jobs Act (“TCJA”) signed into law on December 22, 2017.

The federal government imposes an estate tax on the transfer of property included in the estate of the deceased.  An exemption to the estate tax is available, which allows a certain amount of the decedent’s estate to pass without incurring any taxes. Some, or all, of this exemption can also be used during an individual's lifetime in the form of gifts.

Under the TCJA, the estate tax exemption amount has been doubled from $5.49 million (in 2017) per person to $11.18 million between January 1, 2018 and December 31, 2025. This means that through December 31, 2025, an individual can distribute up to $11.18 million in assets entirely free of estate or gift tax. For a married couple, the amount doubles to $22.36 million, as they may aggregate their exemption. However, on January 1, 2026, the exemption will be subject to a “sunset” provision, causing the amount to revert to the $5.49 million dollar exemption of 2017, plus any increase for inflation.

This raises the question - what happens if a taxpayer utilizes her entire exemption by way of lifetime gifts at the end of 2025 and passes away after January 1, 2026 when the exemption amount has reverted back? This creates concerns as to whether the estate could possibly owe tax even if the decedent had no taxable assets due to prior gifting. The TCJA did not address this issue. Under the Internal Revenue Code (“IRC”) Section 2001 (g)(2), the U.S. Department of Treasury has stated that it will release instructions to address this potential issue as necessary. Schneider Downs is committed to keeping you informed as any instructions come to light.