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The Wealth Advisor
The Wealth Advisor
How to Help Clients Make the Most of the Treasury’s Anti-Clawback Regulations
From MEREDITH | PC

MEREDITH | PC

4325 Windsor Centre Trail
Suite 450
Flower Mound Texas 75028
214-513-1013

The 2017 Tax Cuts and Jobs Act doubled the federal gift and estate tax exclusion amount, which had previously been $5 million (adjusted each year for inflation) per individual. The exclusion amount for 2020, including the adjustment for inflation, is $11.58 million. However, the increase in the exclusion amount is temporary and, unless Congress extends it, will expire on December 31, 2025. This has caused concern that if taxpayers made gifts of the additional $5 million (adjusted for inflation) between January 1, 2018 and December 31, 2025, the benefit could be “clawed back“ in the calculation of their estate taxes if they died on or after January 1, 2026‒i.e., after the expiration of the increased exclusion amount. This concern arose because gift and estate taxes are calculated together, as a unified calculation. The determination of whether any tax is due is made by applying a credit based on the basic exclusion amount. The credit is first applied against the gift tax, and to the extent that any credit remains at death, it is applied against the estate tax. Some worried that if the exclusion amount at death is lower than the amount of the exclusion when lifetime gifts were made, this could create a difficult situation in which tax could be due at death, but no money would be left to pay it, because it had been given away during the taxpayer’s lifetime.

Special Rule

In November 2019, the Internal Revenue Service (IRS) released final regulations providing that taxpayers who take advantage of the higher gift and tax exemption applicable between 2018 and 2025 will not lose the tax benefit of the higher exclusion amount upon their subsequent death on or after January 1, 2026, when the exclusion amount is set to decrease to the pre-tax reform level. Instead, the new IRS regulations adopt a special rule allowing an estate to compute its estate tax credit using the greater of the exclusion amount applicable to gifts made during an individual’s lifetime or the exclusion applicable on the date of death.

Use It or Lose It

The IRS also clarified that the increased exclusion amount is a ’use or lose’ benefit available to an estate only to the extent that a person who dies on or after January 1, 2026 has actually used it by making gifts during the increased exclusion period (between January 1, 2018 and December 31, 2025). In Example 2(1), the IRS provided an illustration of this situation. If Terry, who has never been married, makes gifts of $4 million between January 1, 2018 and December 31, 2025, and dies after December 31, 2025, during a period when the inflation-adjusted amount of the exclusion has reverted to $6.8 million, the credit to be applied for purposes of computing Terry’s estate tax credit is based upon the $6.8 million exclusion amount applicable as of the date of death: That is, the $4 million dollars actually used is treated as the exclusion amount for the period from January 1, 2018 to December 31, 2025, rather than the higher amount (for example, $11.58 million if the gifts were made during 2020) Terry could have utilized, but did not, during the increased exclusion period. As a result, because Terry, now-deceased, only made lifetime gifts of $4 million, the greater of the two exclusion amounts that should be used to calculate the estate tax credit is $6.8 million.

Application to Spousal Portability

The IRS regulation also addresses how the use by a surviving spouse of a deceased spouse’s unused exclusion amount, otherwise known as the portability option, will apply if the increased exclusion amount sunsets as expected at the end of 2025. The portability option allows an estate to elect to transfer any unused portion of the last deceased spouse’s unused gift and estate tax exclusion (DSUE) to the surviving spouse, who can apply it to cover any gift or estate tax liability arising from later lifetime gifts or transfers at death. The new IRS regulation makes clear that if an estate elects to transfer any DSUE to the surviving spouse between January 1, 2018 and December 31, 2025, when the increased exclusion amount is effective, it will not be reduced as a result of the sunset of the increased exclusion amount.

In Example 3, the IRS illustrates that if Whitney died between January 1, 2018 and December 31, 2025, at a time when the exclusion amount was $11.4 million, and Whitney had not made any taxable gifts and did not have a taxable estate, the executor of Whitney’s estate could elect to allow his surviving spouse, Robin, to use his $11.4 million exclusion amount. If Robin, who does not make any lifetime gifts and does not remarry, dies after the sunset of the increased exclusion amount at a date when the exclusion amount is $6.8 million, the credit to be applied in computing Robin’s estate tax is $18.2 million ($11.4 million, the unused portion of the gift and estate tax exclusion amount applicable on Whitney’s date of death, plus $6.8 million, the exclusion amount applicable on Robin’s date of death).

Let’s Collaborate to Help Your Clients Take Advantage of the Tax Savings

Here are a few of the strategies we can implement together to enable your clients to take advantage of the higher exclusion amount available until December 31, 2025 (unless Congress decides to either extend the increase or make it permanent), whose application is now clarified by the IRS’s anti-clawback regulations.

Lifetime gifts. You can help your clients benefit the most from the higher exclusion amount by advising them to make use of it through strategic lifetime gifts. Lifetime gifts typically result in transfer tax savings (assuming the assets gifted do not decline in value). Individual clients have the opportunity to remove $11.58 million and married couples can remove $23.16 million from their taxable estates by making lifetime gifts in 2020. You can provide valuable guidance to your clients by helping them transfer appreciating assets to their children or loved ones‒or preferably to a trust for their benefit, which will provide asset protection for the beneficiaries and direction regarding distributions. This will also enable you to keep assets under management and gain new clients by assisting the next generation with their financial and estate planning.

Spousal lifetime access trusts. If a gift of $11.58 million is too large for your client to comfortably make without retaining some of the benefits of that money, your client can make a completed gift to a spousal lifetime access trust (SLAT), using the temporarily increased exclusion amount. The client’s spouse can be a beneficiary of the trust, providing access to the trust assets to support the family if they are needed. A properly drafted SLAT will ensure that the trust’s assets, including any growth of the assets, will not be subject to estate tax liability at the death of the gifting spouse.

Grantor trusts. Using a grantor trust, your clients can make a gift, taking advantage of the increased exclusion amount, but also pay the income tax, enabling the trust’s beneficiaries to eventually receive assets that have grown with no reductions as a result of the grantor’s payment of the income tax. The grantor can reduce his or her taxable estate both in the amount of the assets transferred to the trust and the amount of income tax paid on the trust assets.

We Are Here to Help

Working together, we can help your clients take advantage of significant tax savings provided by the increased gift and estate tax exclusion amount during the current window of opportunity. We look forward to working with you to create the most advantageous estate plans for your clients, designed with their unique circumstance in mind. Give us a call today to discuss how we can collaborate for your clients’ benefit.
(1) Treasury Decision 9884 (which sets forth the final regulations) states that although the proposed regulations included examples that did not reflect the annual inflation adjustments to the exclusion amount, “the examples in the final regulations reflect hypothetical inflation-adjusted [basic exclusion] amounts.”


This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
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MEREDITH | PC 4325 Windsor Centre Trail Suite 450 Flower Mound Texas 75028