Gift Tax Credits, Exclusion Amounts and “Claw Backs” of Lifetime Gifts in 2026

 

Clawback of Federal Estate and Gift Tax Exemption

On November 22, 2019, the IRS issued permanent regulations clarifying that there would be no “clawback” of large lifetime gifts. More specifically, the Tax Cuts and Jobs Act of 2017 increased the basic transfer tax exclusion amount from $5 million per person to $10 million per person, indexed for inflation.  For 2020, the inflation-adjusted basic exclusion amount is $11.58 million, meaning that an individual can gift a total of $11.58 million during lifetime or at death without paying federal gift or estate tax.  In 2026, absent a change in the law, the exclusion amount is set to revert to the original $5 million per person indexed for inflation.

There has been uncertainty as to what would happen if someone took advantage of the temporarily increased exclusion amount to avoid gift tax on transfers but then died when the exclusion amount was much lower.  Would the lifetime gifts be “clawed back” into the estate and taxed anyway in a post-2026 estate tax calculation?  The regulations issued in November provide that no such clawback will occur.  The rules allow the estate of a decedent to calculate the estate tax credit using the higher of the basic exclusion amount applicable to gifts actually made during lifetime or the basic exclusion amount applicable at death.

To the extent that you have available unused exclusion and are interested in gifting the full $11.58 million exemption currently available, please contact us sooner rather than later to take advantage of what is likely a temporarily increased exclusion.