Basic Exclusion Amount for Estate and Gift Taxes
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IRS proposed Regulations on Basic Exclusion Amount for Estate and Gift Taxes

Basic Exclusion Amount for Estate and Gift Taxes

IRS proposed Regulations on Basic Exclusion Amount for Estate and Gift Taxes

IRS proposed Regulations on Basic Exclusion Amount for Estate and Gift Taxes.

The Tax Cuts and Jobs Act increased the basic exclusion amount (BEA) used to compute federal estate and gift taxes.

  • For decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026, the BEA is $10 million (adjusted for inflation).
  • A special rule was also adopted if the BEA applicable at the time of the decedent’s death is less than the BEA applicable for any gifts made by the decedent.
  • According to the special rule, the portion of the credit allowable against the estate tax attributable to the BEA is the sum of the credits attributable to the BEA allowable in computing the gift tax payable on the decedent’s lifetime gifts.
  • The rule ensures that the estate of a donor is not taxed on completed inter vivos gifts that, as a result of the increased BEA, were free of gift tax when made.
  • As of Jan. 1, 2026, the BEA will drop back down to $5 million (adjusted for inflation).

This week, the IRS issued proposed regulations that will prevent methods that might be used to extend the increased basic exclusion amount for estate and gift taxes if it drops back to the lower level after the end of 2025. The proposed regulations:

  • Apply to estates of decedents dying after 2025 who made certain types of gifts after 2017 and before 2026
  • Provide that the special rule does not apply to transfers that are includible or treated as includible in the gross estate because they are not true inter vivos transfers.

Here’s the drill down

Section 11061 of the TCJA added new section 2001(g)(2) to the general statute of the Code that imposes the Federal estate tax that grants the Secretary of the Treasury to prescribe regulations as may be necessary or appropriate to carry out section 2001 with respect to any difference between the BEA applicable at the time of a decedent’s death and the BEA applicable with respect to any gifts made by the decedent.

This specific authority is in addition to the Secretary’s preexisting authority under section 2010(c)(6) to prescribe such regulations as may be necessary or appropriate to carry out section 2010(c).

On November 26, 2019, the Treasury Department and the IRS published final regulations under section 2010 (TD 9884) in the Federal Register (84 FR 64995) to address situations described in section 2001(g)(2) (final regulations).

The final regulations adopted § 20.2010-1(c), a special rule (special rule) applicable in cases where the credit against the estate tax that is attributable to the BEA is less at the date of death than the sum of the credits attributable to the BEA allowable in computing gift tax payable within the meaning of section 2001(b)(2) with regard to the decedent’s lifetime gifts.

  • In such cases, the portion of the credit against the net tentative estate tax that is attributable to the BEA is based on the sum of the credits attributable to the BEA allowable in computing gift tax payable regarding the decedent’s lifetime gifts.
  • The rule ensures that the estate of a donor is not taxed on completed gifts that, as a result of the increased BEA, were free of gift tax when made.
  • The preamble to the final regulations stated that further consideration would be given to the issue of whether gifts that are not true inter vivos transfers, but rather are includible in the gross estate, should be excepted from the special rule, and that any proposal addressing this issue would benefit from notice and comment.

The special rule currently does not distinguish between:

  • Completed gifts that are treated as adjusted taxable gifts for estate tax purposes and that, by definition, are not included in the donor’s gross estate; and
  • Completed gifts that are treated as testamentary transfers for estate tax purposes and are included in the donor’s gross estate (includible gift).

The Code and the regulations, however, do distinguish between these two types of transfers.

  • Section 2001(b) (flush language) excludes from the term “adjusted taxable gifts” gifts that are includible in the gross estate.
  • Section 2701(e)(6) and § 25.2701-5 similarly remove from adjusted taxable gifts transfers includible in the gross estate that previously were subject to the special valuation rules of section 2701.

Regardless of whether a gift is treated as an adjusted taxable gift or as an includible gift for estate tax purposes, the Code ensures that the gift is treated consistently with respect to the credits allowable in the year in which the gift was made.

The purpose of the special rule is to ensure that bona fide inter vivos transfers of property are consistently treated as a transfer of property by gift for both gift and estate tax purposes.

  • Bona fide inter vivos gifts are subject to the gift tax based on the values, gift tax rates, and exclusions applicable as of the date of the gift.
  • While such a gift is treated as an adjusted taxable gift for purposes of determining the estate tax rate to be applied to the value of the taxable estate, the gift is not includible in the donor’s gross estate at death and is not subject to the estate tax.
  • The special rule avoids the imposition of the estate tax on the gift by ensuring that the gifted property is treated solely as an adjusted taxable gift and not also as property includible in the gross estate.

Unlike an adjusted taxable gift, however, a gift of property that is includible in the donor’s gross estate is subject to estate tax based on the values, estate tax rates, and exclusions applicable as of the date of death.

There is a subset of includible gifts that the Code treats in a different fashion, but still in a way that results in the correct outcome without the application of the special rule.

  • That subset consists of gifts made during an increased BEA period that are essentially testamentary, but the entire value of which is deductible for gift tax purposes by reason of the charitable or marital deduction (or both).
  • Such transfers are excluded from adjusted taxable gifts because they never were taxable gifts in the first place.
  • As a result of the exclusion of charitable and marital gifts from taxable gifts, and thus from adjusted taxable gifts, there would be no credits allocable to these gifts attributable to the BEA in computing gift tax payable within the meaning of section 2001(b)(2).
  • Because no BEA is applicable to the deductible gifts, there will be no difference between the BEA applicable to these gifts attributable to the increased BEA and the BEA applicable to the decedent’s estate.
  • As a result, there is no possibility of inconsistent gift and estate taxation of such an includible gift, and thus no need for the application of the special rule.

Without additional rules, however, the application of the special rule to includible gifts results in securing the benefit of the increased BEA in circumstances where the donor continues to have the title, possession, use, benefit, control, or enjoyment of the transferred property during life.

  • In those circumstances, there is no possibility of the inclusion of the gift in adjusted taxable gifts at the death of the donor, and therefore no need for the application of the special rule to transfers of such property.
  • In those circumstances, it is appropriate that the amount includible or treated as includible as part of the gross estate (rather than as an adjusted taxable gift) is subject to estate tax with the benefit of only the BEA available at the date of death.
  • Section 2001(g)(2) directs the Secretary to prescribe such regulations as may be necessary or appropriate to carry out section 2001 with respect to any difference between the BEA applicable at the time of the decedent’s death and the BEA applicable with respect to any gifts made by the decedent.
  • Given the plain language of the Code describing the computation of the estate tax and directing that certain transfers, including transfers made within three years of death that otherwise would have been includible in the gross estate, are treated as testamentary transfers and not as adjusted taxable gifts, it would be inappropriate to apply the special rule to includible gifts.
  • This is particularly true where the inter vivos transfers are not true bona fide transfers in which the decedent “absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred property.” Commissioner v. Church’s Estate, 335 U.S. 632, 645 (1949).
  • To prevent this inappropriate result, these proposed regulations would create an exception to the special rule applicable to includible gifts.

The Provisions as I Presently Understand

Pursuant to sections 2010(c)(6) and 2001(g)(2) of the Code, the proposed regulations would add proposed § 20.2010-1(c)(3) to provide an exception to the special rule for transfers that are includible in the gross estate or are treated as includible in the gross estate for purposes of section 2001(b), including for example gifts subject to a retained life estate or subject to other powers or interests as described in sections 2035 through 2038 and 2042 of the Code regardless of whether the transfer was deductible pursuant to section 2522 or 2523, gifts made by enforceable promise, and other amounts that are duplicated in the transfer tax base, including a section 2701 interest within the meaning of § 25.2701-5(a)(4) and a section 2702 interest within the meaning of § 25.2702-6(a)(1).

The exception to the special rule also would apply to transfers that would be described in the preceding sentence but for the transfer, elimination, or relinquishment within 18 months of the donor’s date of death of the interest or power that would have caused inclusion in the gross estate, effectively allowing the donor to retain the enjoyment of the property for life.

The special rule, however, would continue to apply to transfers includible in the gross estate when the taxable amount of the gift is not material, that is, the taxable amount is 5 percent or less of the total amount of the transfer, valued as of the date of the transfer.

The proposed exception to the special rule may be illustrated by the following example.

  • Assume that when the BEA was $11.4 million, a donor gratuitously transferred the donor’s enforceable $9 million promissory note to the donor’s child. The transfer constituted a completed gift of $9 million.
  • On the donor’s death, the assets that are to be used to satisfy the note are part of the donor’s gross estate, with the result that the note is treated as includible in the gross estate for purposes of section 2001(b).
  • Thus, the $9 million gift is excluded from adjusted taxable gifts in computing the tentative estate tax under section 2001(b)(1).
  • Nonetheless, if the donor dies after a statutory reduction in the BEA to $6.8 million, the credit to be applied in computing the estate tax is the credit based upon the $6.8 million of the BEA allowable as of the date of death.

The IRS proposed regulations detail 7 other examples.

Example 1

Individual A made a completed gift of A’s promissory note in the amount of $9 million. The note remained unpaid as of the date of A’s death.

  • The assets that are to be used to satisfy the note are part of A’s gross estate, with the result that the note is treated as includible in the gross estate for purposes of section 2001(b) and is not included in A’s adjusted taxable gifts.
  • Because the note is treated as includible in the gross estate and does not qualify for the 5 percent de minimis rule in paragraph (c)(3)(ii)(A) of this section, the exception to the special rule found in paragraph (c)(3) of this section applies to the gift of the note.
  • The credit to be applied for purposes of computing A’s estate tax is based on the $6.8 million basic exclusion amount as of A’s date of death, subject to the limitation of section 2010(d).
  • The result would be the same if A or a person empowered to act on A’s behalf had paid the note within the 18 months prior to the date of A’s death.

Example 2

Assume that the facts are the same as in Example 1 except that A’s promissory note had a value of $2 million and, on the same date that A made the gift of the promissory note, A also made a gift of $9 million in cash. The cash gift was paid immediately, whereas the $2 million note remained unpaid as of the date of A’s death.

  • The assets that are to be used to satisfy the note are part of A’s gross estate, with the result that the note is treated as includible in the gross estate for purposes of section 2001(b) and is not included in A’s adjusted taxable gifts.
  • Because the $2 million note is treated as includible in the gross estate and does not qualify for the 5 percent de minimis rule in paragraph (c)(3)(ii)(A) of this section, the exception to the special rule found in paragraph (c)(3) of this section applies to the gift of the note.
  • On the other hand, the $9 million cash gift was paid immediately, and no portion of that gift is includible or treated as includible in the gross estate.
  • Because the amount allowable as a credit in computing the gift tax payable on A’s $9 million cash gift exceeds the credit based on the $6.8 million basic exclusion amount allowable on A’s date of death, the special rule of paragraph (c) of this section applies to that gift.
  • The credit to be applied for purposes of computing A’s estate tax is based on a basic exclusion amount of $9 million, the amount used to determine the credit allowable in computing the gift tax payable on A’s $9 million cash gift.

Example 3

Assume that the facts are the same as in Example 1 except that, prior to A’s gift of the note, the executor of the estate of A’s predeceased spouse elected, pursuant to § 20.2010-2, to allow A to take into account the predeceased spouse’s $2 million DSUE amount. Assume further that A’s promissory note had a value of $2 million on the date of the gift, and that A made a gift of $9 million in cash a few days later. The cash gift was paid immediately, whereas the $2 million note remained unpaid as of the date of A’s death.

  • The assets that are to be used to satisfy the note are part of A’s gross estate, with the result that the note is treated as includible in the gross estate for purposes of section 2001(b) and is not included in A’s adjusted taxable gifts.
  • Because A’s DSUE amount was sufficient to shield the gift of the note from gift tax, no basic exclusion amount was applicable to the $2 million gift pursuant to paragraph (c)(1)(ii)(A) of this section and the special rule of paragraph (c) of this section does not apply to that gift.
  • On the other hand, the $9 million cash gift was paid immediately, and no portion of that gift is includible or treated as includible in the gross estate.
  • Because the amount allowable as a credit in computing the gift tax payable on A’s $9 million cash gift exceeds the credit based on the $6.8 million basic exclusion amount allowable on A’s date of death, the special rule of paragraph (c) of this section applies to that gift.
  • The credit to be applied for purposes of computing A’s estate tax is based on A’s $11 million applicable exclusion amount, consisting of the $2 million DSUE amount plus the $9 million amount used to determine the credit allowable in computing the gift tax payable on A’s $9 million cash gift.

Example 4

Individual B transferred $9 million to a grantor retained annuity trust (GRAT), retaining a qualified annuity interest within the meaning of § 25.2702-3(b) of this chapter valued at $8,550,000. The taxable portion of the transfer valued as of the date of the transfer was $450,000. B died during the term of the GRAT.

  • The entire GRAT corpus is includible in the gross estate pursuant to § 20.2036-1(c)(2).
  • Because the value of the taxable portion of the transfer was 5 percent or less of the total value of the transfer determined as of the date of the gift, the 5 percent de minimis rule in paragraph (c)(3)(ii)(A) of this section is met and the exception to the special rule found in paragraph (c)(3) of this section does not apply to the gift.
  • However, because the total of the amounts allowable as a credit in computing the gift tax payable on B’s post-1976 gift of $450,000 is less than the credit based on the $6.8 million basic exclusion amount allowable on B’s date of death, the special rule of paragraph (c) of this section does not apply to the gift.
  • The credit to be applied for purposes of computing B’s estate tax is based on the $6.8 million basic exclusion amount as of B’s date of death, subject to the limitation of section 2010(d).

Example 5

Assume that the facts are the same as in Example 4 except that B’s qualified annuity interest is valued at $8 million. The taxable portion of the transfer valued as of the date of the transfer was $1 million.

  • Because the value of the taxable portion of the transfer was more than 5 percent of the total value of the transfer determined as of the date of the gift, the 5 percent de minimis rule in paragraph (c)(3)(ii)(A) of this section is not met and the exception to the special rule found in paragraph (c)(3) of this section applies to the gift.
  • The credit to be applied for purposes of computing B’s estate tax is based on the $6.8 million basic exclusion amount as of B’s date of death, subject to the limitation of section 2010(d).

Example 6

Assume that the facts are the same as in Example 4 except that B’s qualified annuity interest is valued at $2 million. The taxable portion of the transfer valued as of the date of the transfer was $7 million.

  • B survived the term of the GRAT.
  • Because B survived the original unaltered term of the GRAT, no part of the value of the assets transferred to the GRAT is includible in B’s gross estate, and the exception to the special rule found in paragraph (c)(3) of this section does not apply to the gift.
  • Moreover, because the amount allowable as a credit in computing the gift tax payable on B’s $7 million gift exceeds the credit based on the $6.8 million basic exclusion amount allowable on B’s date of death, the special rule of paragraph (c) of this section applies to the gift.
  • The credit to be applied for purposes of computing B’s estate tax is based on a basic exclusion amount of $7 million, the amount used to determine the credit allowable in computing the gift tax payable on B’s transfer to the GRAT.

Example 7

Individual C transferred $9 million to a grantor retained income trust (GRIT), retaining an income interest valued at $0 pursuant to section 2702(a)(2)(A). The taxable portion of the transfer valued as of the date of the transfer was $9 million. C died during the term of the GRIT.

  • The entire GRIT corpus is includible in C’s gross estate pursuant to section 2036(a)(1) because C retained the right to receive all of the income of the GRIT.
  • Because the transferred assets are includible in the gross estate and do not qualify for the 5 percent de minimis rule in paragraph (c)(3)(ii)(A) of this section, the exception to the special rule found in paragraph (c)(3) of this section applies to the gift.
  • The credit to be applied for purposes of computing C’s estate tax is based on the $6.8 million basic exclusion amount as of C’s date of death, subject to the limitation of section 2010(d).

If you made it this far, thank you for reading my tax musings.  Put yourself down for a raise and take the rest of the day off.  First though consider yourself encourage to provide a public comment.

Electronic submissions via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-118913-21) by following the online instructions for submitting comments.

For more information on these IRS proposed Regulations on Basic Exclusion Amount for Estate and Gift Taxes contact me.



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