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By Jeffrey R. Wolfe, Senior Vice President, Manager of Wealth Planning Strategies

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In a recent announcement, the IRS has confirmed it will not pursue “clawback” for large gifts made under the current estate and gift tax regime. What that means is that individuals may use the new, higher gift tax exclusion amount (currently $11.18 million per person) without a fear that the IRS may look to “clawback” any taxes that could be owed if/when the exclusion goes down in the future.

Perhaps the best way to explain this is with an example. Under current law the exclusion is set to return to $5 million (indexed for inflation) on January 1, 2026. Therefore, if someone made an $11 million gift today with the current $11.18 million exclusion, they would be able to utilize their exclusion and no tax would be owed on the transfer. However, what if that person then passed away in 2026 when the exclusion drops to $5 million? In other words, the question has been would the estate owe tax on the $6 million difference ($11 million lifetime gift less $5 million exclusion at death, leaving $6 million potentially subject to tax)? This potential “gotcha” tax trap has been called clawback.

The Congress and the IRS have always said that they did not intend to allow clawback, but no formal rules have been created. With recent proposed regulations, the IRS has confirmed that clawback will not occur. The upshot here is that anyone looking to take advantage of the current large exclusion can do so without any fear of future taxable consequences. While it’s possible the regs could change between proposal and finalization, that is very unlikely.

Consequently, if you are in a situation where you can take advantage of the larger exclusion amounts, it’s currently a “use it or lose it” situation. Barring a new act of Congress, the exclusion will revert in 2026. Work with your Benjamin F. Edwards financial advisor, in partnership with your tax and legal advisors, to explore opportunities to shift wealth in a tax efficient manner under these current rules. The IRS isn’t always this benevolent, so take advantage of this opportunity if the time is right for you.

December 5, 2018 |