(PatrioticPost.com)- Last week, the Internal Revenue Service proposed new regulations that would provide an exception to the special rule that preserves the benefits of the temporarily higher gift and estate basic exclusion amount.
In November 2019, the IRS issued what it called the final “Anti-Clawback” regulations making it clear that a taxpayer who took advantage of the higher gift tax exemptions available under the 2017 Trump Tax Cuts would not owe additional estate taxes if the exemption is lower at the time of death.
The Anti-Clawback regulation was necessary since the calculation of estate tax includes lifetime taxable gifts. Without it, a taxpayer who made a larger gift now may not have to pay gift tax, but the estate would pay estate tax upon the taxpayer’s death if the exemption at that time was lower.
The proposal issued last week clarifies that certain gifts in which the donor retains an interest (or Retained Interest Gifts) can’t be used to take advantage of the higher exemption.
This proposed provision would apply to transactions that are purposely structured to try and make use of the increased exemption while maintaining some use of the gifted assets. It would also apply to retained interest gifts like GRATs (grantor retained annuity trusts), QPRTs (Qualified Personal Residence Trusts), or promissory notes still outstanding at death.
In short, with the new proposed regulation, Retained Interest Gifts will be included in the estate tax calculation based on the value at death and the exemption at the time of death and rates would apply. The regulation would prevent a taxpayer from using these techniques to lock in the higher exemption while still having access to the gifted assets until their death.
The proposed regulations would exempt smaller Retained Interest Gifts where the gift is less than 5 percent of the total transfer.
It also includes an 18-month rule, namely, if a taxpayer gives up the retained interests within 18 months before his death, those retained interests will be included in the estate tax calculation at the exemption and rates at the time of death.
