In proposed regulations issued Wednesday (REG-106706-18), the IRS addressed issues and made conforming revisions arising from the temporary increase in basic exclusion amount for estate and gift tax enacted by legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.

For gifts made and estates of decedents dying before Jan. 1, 2018, prior law (Sec. 2010(c)(3)(A)) provided an exclusion from taxable gifts or estates of $5 million, indexed for inflation after 2011. For gifts made or estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026, the TCJA increased the amount to $10 million, also indexed for inflation after 2011 (Sec. 2010(c)(3)(C)). Thus, the amount for 2017 was $5.49 million and, for 2018, $11,180,000 (rising to $11.4 million in 2019). The basic exclusion amount is expressed in a gift or estate tax calculation as a credit against tentative tax equal to the applicable credit amount under Sec. 2010(c).

The TCJA also, in Sec. 2001(g)(2), granted the IRS authority to prescribe regulations to carry out Sec. 2001, which prescribes the imposition and rate of estate and gift tax, with respect to any difference between the basic exclusion amount applicable at the time of a decedent’s death and with respect to any gifts made by the decedent.

Commenters have raised questions about inconsistent tax treatment that could arise as a result of the temporary nature of the increased exclusion amount, the IRS said in a preamble to the proposed regulations. Particularly, these commenters pointed out, the statutory sunset of the higher basic exclusion amount and reversion to the lower amount could, in effect, retroactively deny taxpayers who die after 2025 the full benefit of the higher exclusion amount applied to previous gifts.

This scenario has sometimes been called a “clawback” of applicable exclusion amount and was a concern in 2012, with the impending sunset of a similarly temporary increase in the exclusion (to $5 million, adjusted for inflation) that had been provided under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. In that case, the issue was avoided altogether by the increase’s being made permanent by the American Taxpayer Relief Act of 2012, P.L. 112-240.

Consequently, the IRS is proposing a special rule for such cases (Prop. Regs. Sec. 20.2010-1(c)): Where the portion of the allowable credit amount as of a decedent’s death is less than the sum of the credit amounts allowable in computing (post-1976) gift tax, the estate tax credit may be based on the greater of the two credit amounts. For purposes of both the estate and gift calculations, the allowable credit is limited to the portion attributable to the basic exclusion amount.

For example (Prop. Regs. Sec. 20.2010-1(c)(2)), if an unmarried individual made post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025, when the basic exclusion amount is $5 million, the special rule would allow the applicable credit amount against estate tax to be based on a basic exclusion amount of $9 million.

Two other questions raised by commenters do not require any regulatory changes, the IRS stated in the preamble. Both concerned taxpayers who exhausted their basic exclusion amount with gifts made before 2018 and paid gift tax, then make a further gift or die within the period of the higher exclusion. Would the higher exclusion be applied toward the earlier gifts, thus reducing the amount currently available for gift or estate tax purposes? No, the IRS answered.

The new proposed rules will be effective when they are finalized. The IRS is inviting comments on the proposed regulations.

— Paul Bonner (paul.bonner@aicpa-cima.com) is a Tax Adviser senior editor.