A new IRS proposal protects taxpayers from having to pay estate tax on large gifts made from 2018 through 2025 that are currently exempt from the gift tax because of a higher threshold set in tax reform.

The 2017 tax law doubled the estate and gift tax exclusion to $10 million, adjusted for inflation, for individuals. In 2018 this means an individual can pass up to $11.18 million without paying gift tax during his or her lifetime or estate tax at death, and a married couple can pass twice that at $22.36 million.

Under the law the exclusion amount returns to its pre-2018 level after 2025.

Doubling the exclusion amount and then sunsetting that provision so it’s halved in eight years can create situations where different exclusion amounts apply at the time of a person’s death versus at the time of a prior lifetime gift. This can cause problems when it is time to calculate the credit that is available to reduce the estate tax due at death, which is based on the applicable exclusion amount.

The Protection

The Internal Revenue Service issued proposed regulations (REG-106706-18) Nov. 20 to address the issue and protect taxpayers who made large gifts during the temporary period where higher exclusion amounts applied. Otherwise, taxpayers could have owed estate tax on those transfers in later years, when the exclusion amount and corresponding credit are lower than in the years when gifts were made.

The agency is creating a special rule that allows an estate to apply the higher credit available at the time of the gift, rather than the lower credit that kicks in after 2025.

“If these regulations are adopted, taxpayers will know that the credit in effect at the time a gift is made will be used in calculating total tax due at death,” said William I. Sanderson, a partner and co-chair of McGuireWoods LLP’s private wealth services group in Washington.

“They won’t get caught having made a gift and paying more tax later,” he said.