Gift & Estate Tax Question

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  • #1892
    Geraldson
    Participant

    I have a question about the current situation regarding gift and estate taxation. Under the current law, the amount that can pass, per person, gift/estate tax free, will drop from about $11,400,000 in 2019, to half of that, in 2026 (all adjusted along the way for inflation).

    How will prior gifts be treated if one dies in/after 2026 and the law does not change? If a wealthy person gifts $2,000,000 in 2019 then dies with $10,000,000 in 2026, will his exemption be $5,700,000, total, the same as for a wealthy decedent who did not gift previously? What about the wealthy person who gifted $11,400,000 in 2019 and dies with more?

    So I guess I’m asking two questions:

    1. The situation of a person making large gifts prior to 2026, but less than the exemption amount at the time of the gift, then dying after 2025.

    2. The situation of a person gifting his/her entire exemption amount before 2026, then dying with more after 2025.

    • This topic was modified 2 years, 8 months ago by Geraldson.
    • This topic was modified 2 years, 8 months ago by Geraldson.
    #1895
    Kaye Thomas
    Moderator

    The Treasury recently responded to concerns about the temporary nature of the increase in the basic exclusion amount by publishing proposed regulations. For a full explanation, see the introductory material in that document. Basically they found one situation where a change in the regs is necessary to make it all work so that taxpayers would not be double taxed or otherwise deprived of the benefit of the temporary increase after the amount drops back to the lower level, and this proposed reg makes that fix.

    The example is someone who makes $9 million in gifts that are covered by the credit during the period when BEA is $10 million but dies after BEA drops to $5 million. This individual’s credit amount at death will be treated as equal to the credit used (credit on $9 million), not the smaller credit on $5 million that is generally in effect on the date of death.

    #1896
    Geraldson
    Participant

    Thank you so much for the reply, Kaye. The example that the IRS uses doesn’t quite apply directly to my suggested hypothetical. Because the IRS’s millionaire has gifted $9 million, which is MORE than the future BEA (thanks for that term too…”BEA”…new to me). My question applies to the millionaire who gifts less than the future BEA, but will have a unified prior gift and estate sum of more than the future BEA. My guy seems to get no credit for the prior gift yet had his gift been much bigger, he’d get full credit.

    In the IRS scenario, above, the decedent will have been able to transfer $9 million tax free because he did so before 2026. Yet the millionaire who gifts $2 million today and dies with, say $10 million more after 2025, will only get credit for $5 million…right? Or will he/she get credit for $7 million, to be in fairness parity with the wealthier guy who was able to gift a full $9 million during his lifetime. (I know, taxation is often not fair, but I’m seriously just trying to understand how this is going to work.)

    • This reply was modified 2 years, 8 months ago by Geraldson.
    • This reply was modified 2 years, 8 months ago by Geraldson.
    • This reply was modified 2 years, 8 months ago by Geraldson.
    #1902
    Kaye Thomas
    Moderator

    Credit would be for $5 million. In your example, the decedent didn’t take advantage of the higher limit while it was in place, so it ends up having no effect.

    It seems like you want someone to be able to use part or all of the top half of the $10 million first, so the original $5 million would be preserved after the amount drops back, but that doesn’t fit the statutory scheme at all. You have to use the bottom half first.

    #1904
    Geraldson
    Participant

    Thank you for that clarification.

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