TCJA Sunset: Estate and Gift Tax May Impact a Lot of Families
by Jack Naranjo
Current Law
The 2024 lifetime estate and gift tax exemption is $13.61 million per person / $27.22 million per couple. To get the full benefit of $27.22 million exemption per couple, some estate planning is essential; for example, use of credit bypass trusts or electing portability of the decedent's unused exclusion amount for the benefit of the surviving spouse.
Effect of the Sunset
This 2024 exemption amount is the highest exemption in US history. However, without any Congressional action, this exemption amount will expire when provisions of the Tax Cuts and Jobs Act of 2017 sunset on January 1, 2026.
Thus, if Congress fails to act, the exemption amount will revert to its pre-TCJA level of $5.6 million per individual, with an adjustment for inflation from 2017. The adjusted exemption amount is expected to be about $7 million per individual / $14 million per couple. This will impact a lot more families than those affected by the current exemption amount.
Planning Challenges
If a person makes a 'completed' gift before the sunset, the pre-sunset gift will get the benefit of the pre-sunset exemption amount, even though that person’s death occurs after the sunset. (This is referred to as the anti-clawback rule.) Thus, many estate plEstate and Gift Taxanners and CPAs have urged affluent clients to begin planning gift transactions prior to the sunset, in case Congress fails to act before the sunset.
If Congress fails to extend the TCJA exemption amounts, there may be an avalanche of gift transfers made in 2025. This will probably happen through transfers to various complex inter vivos irrevocable trusts and/or transfers of ownership interests in business entities, partnership interests in family LPs, membership interests in family LLCs, etc.
A common planning challenge is balancing the requirement to make "completed gifts" under Treasury Regulation section 25.2511-2, while desiring to retain some degree of control over the transferred wealth.
Another challenge is the transferred basis rule for gifts. Section 1014(a) of the Internal Revenue Code states that if you acquire property from a decedent, you get a 'stepped up' basis, which is a basis equal to the fair market value of the asset at the time of death. For example, if your grandfather leaves you in his will a rental property that is worth $1 million at the time of his death, you will inherit the property with $1 million of basis. The effect of this is that you can sell it immediately for fair market value tax-free because the sales proceeds are equal to the basis. On the other hand, section 1015(a) of the Internal Revenue Code provides that gifted assets take a transferred basis, which is the basis that the transferor had at the time of the gift. For example, if your grandfather gifts you a rental property that is worth $1 million, but, only has $100,000 of basis (due to depreciation deductions), then, if you immediately sell this property for its fair market value, the sale will result in a realized taxable capital gain of $900,000 to you.
How we tax planners navigate the 'completed gift' rules and basis rules will require advanced tax law expertise and plenty of creativity. Undoubtedly, new ideas to resolve these conflicts will result in decades of litigation, not to mention that, in light of the Chevron case being overturned, the authority of Treasury Regulations is somewhat uncertain.
