Potential Claw-Back from IRS of Gifted Assets

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Justin Time
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Potential Claw-Back from IRS of Gifted Assets

Post by Justin Time » Sun Aug 26, 2018 5:17 pm

Hi,

The current 2018 gift tax exemption is $11,180,000. In seven years, the sunset provision of the law will reset that value to $5,000,000 (unless Congress acts). In the event someone were to gift, say, $6,000,000 today and then die after the exemption is lowered, would the IRS claw-back the excess exemption and demand payment from the beneficiaries? I cannot find any IRS ruling on this matter.

In looking for a precedent, I did find one time in history where the estate tax decreased. In 1934, the estate and gift tax exemption were both $50,000. From 1935-1937, the estate tax and gift tax exemptions both decreased to $40,000. I’m thinking that at least one guy back in 1934 would have gifted at the max limit and then addressed the claw-back issue with the IRS and hence maybe there is some precedent/ruling (?)

Has any thought about this when they have gone through estate planning ?

Thanks!

bsteiner
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by bsteiner » Sun Aug 26, 2018 5:35 pm

The gift tax exemption decreased again in 1942 to $30,000, where it remained through 1976. I never had any cases where someone used the $40,000 or $50,000 exemption pre-1942.

The Tax Cuts and Jobs Act added Section 2001(b)(1) which provides for no clawback.

But in your example, if you give away $6 million now, and the exclusion amount reverts to $6 million, you won't have any exclusion amount remaining. You have to give away more than what the exclusion amount will be in 2026 to benefit from the increased amount in effect in 2018-2025. To get the full benefit of the 2018-2025 amount, you have to give away the entire 2025 exclusion amount by the end of 2025.

Leesbro63
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by Leesbro63 » Sun Aug 26, 2018 6:22 pm

So I think the real question is what happens to the estate of the person who gifts $11M (about) before 12/31/25 and dies shortly thereafter? And this question can be subdivided to look at the estate in the above scenario that has little left (will the giftee get clawed?) versus an estate with a lot left (the estate tax can be based on the new, lower exemption, before distribution to beneficiaries).

I guess the simpler question is what are people who have over $11m ($22M if married), but are not much wealthier than that, doing? Or, what options might top estate attorneys (ahem, bsteiner) present?

FreemanB
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by FreemanB » Mon Aug 27, 2018 10:30 am

My opinion only, and I'm no expert, but I don't think the term "Claw-Back" applies in this situation, since no taxes are levied until the person's death. That's the only time the exclusion limit is applied, when determining any estate tax liabilities. From the tax code, "(C) Increase in basic exclusion amount In the case of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting "$10,000,000" for "$5,000,000" seems to directly state that gifts made in that time period are subject to an exclusion limit of $10,000,000 instead of the $5,000,000.

AlohaJoe
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by AlohaJoe » Mon Aug 27, 2018 10:49 am

Justin Time wrote:
Sun Aug 26, 2018 5:17 pm
The current 2018 gift tax exemption is $11,180,000. In seven years, the sunset provision of the law will reset that value to $5,000,000 (unless Congress acts). In the event someone were to gift, say, $6,000,000 today and then die after the exemption is lowered, would the IRS claw-back the excess exemption and demand payment from the beneficiaries?
The 2018 gift tax exemption of $11,180,000 only applies to people who die in 2018. If you don't die in 2018 then the 2018 gift tax isn't relevant to how much you pay when you do die.

However, I see what you're getting at. We don't even have to think about cases with estate tax thresholds changing. What if someone gives away $50 million in the last few years of their life to their daughter? And dies broke, without enough money to pay the taxes that their estate owes?

Anyway, the answer is "yes, the IRS will come after beneficiaries if an estate doesn't pay their tax". You can google and find many, many stories about it happening.

https://www.cpajournal.com/2017/10/31/e ... -decedent/

edited to add:

Here's a case of the IRS coming back 10 years after the fact to ask the beneficiary to pay for missing estate taxes
https://www.forbes.com/sites/peterjreil ... b5dd222ee5

PhilosophyAndrew
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by PhilosophyAndrew » Mon Aug 27, 2018 10:58 am

OP, your estate will be taxed following the laws on force at the time of your death.

Andy.

Leesbro63
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by Leesbro63 » Mon Aug 27, 2018 12:09 pm

PhilosophyAndrew wrote:
Mon Aug 27, 2018 10:58 am
OP, your estate will be taxed following the laws on force at the time of your death.

Andy.
It's not quite that simple/clear. If the gift exemption is $11M before 12/31/25, and you gifted that amount before that date....but the "Estate and Gift Tax Exemption Amount" is half of that after that date and you die in early 2026, what is the "law in force" at that time? That you gifted a larger amount when that was allowed to pass tax free or that your combined prior gifts and current estate now only allows half of that to pass tax free?

47Percent
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by 47Percent » Mon Aug 27, 2018 12:43 pm

Leesbro63 wrote:
Mon Aug 27, 2018 12:09 pm
PhilosophyAndrew wrote:
Mon Aug 27, 2018 10:58 am
OP, your estate will be taxed following the laws on force at the time of your death.

Andy.
It's not quite that simple/clear. If the gift exemption is $11M before 12/31/25, and you gifted that amount before that date....but the "Estate and Gift Tax Exemption Amount" is half of that after that date and you die in early 2026, what is the "law in force" at that time? That you gifted a larger amount when that was allowed to pass tax free or that your combined prior gifts and current estate now only allows half of that to pass tax free?
In a simpler version of the same case, what happens to the 529 gifting if it is 5 year averaged, and the person who gifts dies in year 2 or 3?
I do remember reading something specific in that case. But can't quite recall.

I know it is not exact parallel as in almost all cases it will still fall within lifetime exclusion.
But still, if someone can find that, it can give some clue as to what happens in OP's scenario.

Justin Time
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by Justin Time » Mon Aug 27, 2018 1:16 pm

bsteiner wrote:
Sun Aug 26, 2018 5:35 pm
The Tax Cuts and Jobs Act added Section 2001(b)(1) which provides for no clawback.
As the OP, I found that page 3 of this article (https://www.bessemertrust.com/portal/bi ... _FINAL.pdf) suggests that the original intent of 2001(g)(2) was to address claw-back, but there was no actual guidance provided on the exact interpretation of that section of the IRS code. Thus, there would be no guarantees. At least that is how I read it.

Leesbro63
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by Leesbro63 » Mon Aug 27, 2018 1:37 pm

47Percent wrote:
Mon Aug 27, 2018 12:43 pm
Leesbro63 wrote:
Mon Aug 27, 2018 12:09 pm
PhilosophyAndrew wrote:
Mon Aug 27, 2018 10:58 am
OP, your estate will be taxed following the laws on force at the time of your death.

Andy.
It's not quite that simple/clear. If the gift exemption is $11M before 12/31/25, and you gifted that amount before that date....but the "Estate and Gift Tax Exemption Amount" is half of that after that date and you die in early 2026, what is the "law in force" at that time? That you gifted a larger amount when that was allowed to pass tax free or that your combined prior gifts and current estate now only allows half of that to pass tax free?
In a simpler version of the same case, what happens to the 529 gifting if it is 5 year averaged, and the person who gifts dies in year 2 or 3?
I do remember reading something specific in that case. But can't quite recall.

I know it is not exact parallel as in almost all cases it will still fall within lifetime exclusion.
But still, if someone can find that, it can give some clue as to what happens in OP's scenario.

This is totally different. It’s a unique thing where IRS regulations allow you to pull forward future annual
goft exemptions. If you die before those future years happen, then any amount that would have been applied to future years is considered part of the deceased’s estate. Different from a current gift tax exemption limit that gets reduced later, after the gift is made, when added to someone’s estate to compute the Unified Gift and Estate Credit.

FreemanB
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by FreemanB » Mon Aug 27, 2018 1:50 pm

Leesbro63 wrote:
Mon Aug 27, 2018 12:09 pm
It's not quite that simple/clear. If the gift exemption is $11M before 12/31/25, and you gifted that amount before that date....but the "Estate and Gift Tax Exemption Amount" is half of that after that date and you die in early 2026, what is the "law in force" at that time? That you gifted a larger amount when that was allowed to pass tax free or that your combined prior gifts and current estate now only allows half of that to pass tax free?
Did you see my earlier post? The code section 2010(c)(3) states:
"In the case of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting “$10,000,000” for “$5,000,000”."

I'm no expert, but I've read my share of code sections. Anyone else can correct me if they disagree, but here's my interpretation: If someone dies during this period, gifts made both during and prior to the law will be subject to the $10m exclusion. Gifts made between those two dates are subject to an exclusion amount of $10,000,000, from a strict reading of the code, even if the death doesn't occur until after the exclusion period expires. In your scenario, dying in early 2026 won't change the exclusion of any gifts made in 2025.

That's just my opinion, and others may have better understanding, but that would seem to be the intent of the law. What actually plays out is subject to courts, more legislative action, and who knows what else.

Leesbro63
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by Leesbro63 » Mon Aug 27, 2018 1:52 pm

Justin Time wrote:
Mon Aug 27, 2018 1:16 pm
bsteiner wrote:
Sun Aug 26, 2018 5:35 pm
The Tax Cuts and Jobs Act added Section 2001(b)(1) which provides for no clawback.
As the OP, I found that page 3 of this article (https://www.bessemertrust.com/portal/bi ... _FINAL.pdf) suggests that the original intent of 2001(g)(2) was to address claw-back, but there was no actual guidance provided on the exact interpretation of that section of the IRS code. Thus, there would be no guarantees. At least that is how I read it.

This is a great find, Justin Time! Unfortunately, you’re right, it’s inconclusive. It could be that interpretation and enforcement, in either direction, will depend on political winds as we approach and pass 2025. My own guess is that it will be unpopular to try to claw back taxes on prior gifts, but it would be prudent for Bogleheads (who might be subject to estate tax under the 2026 system) to assume the current law will not be changed.

PhilosophyAndrew
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by PhilosophyAndrew » Mon Aug 27, 2018 3:04 pm

Leesbro63 wrote:
Mon Aug 27, 2018 12:09 pm
PhilosophyAndrew wrote:
Mon Aug 27, 2018 10:58 am
OP, your estate will be taxed following the laws on force at the time of your death.

Andy.
It's not quite that simple/clear. If the gift exemption is $11M before 12/31/25, and you gifted that amount before that date....but the "Estate and Gift Tax Exemption Amount" is half of that after that date and you die in early 2026, what is the "law in force" at that time? That you gifted a larger amount when that was allowed to pass tax free or that your combined prior gifts and current estate now only allows half of that to pass tax free?
Yes, this is an interesting question.

Without a clear answer, it might be prudent for individuals potentially affected by this change to ensure that their estates possess sufficient assets to pay taxes that emight end up being due after their post-2025 death.

This is definitely a good question to raise with one’s estate planning professionals.

Andy.

Justin Time
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by Justin Time » Mon Aug 27, 2018 9:17 pm

One additional note, there was similar angst in 2011. There is a great discussion including worked examples here, although it is a heavy read, http://www.themadisongroup.com/Resource ... 032211.pdf.

Leesbro63
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by Leesbro63 » Tue Sep 25, 2018 9:30 am

I recently found this (below). It doesn’t directly address the issue of large gifts made before 1/1/26. But the fact that they did not retroactively raise the gift tax rate in late 2010 suggests a precedent. Which is for NOT clawing back tax on large gifts made before the gift tax exemption reverts to a lower level in 2026. Basically recognizing that a prior gift is a fait accompli.

“2010 Gift Tax Rules
While TRA 2010 made significant changes to the rules governing federal estate taxes, it did not affect the lifetime gift tax exemption, which remained at $1 million. However, under the provisions of EGTRRA, the gift tax rate was supposed to be reduced from 45 percent in 2009 to 35 percent in 2010, and TRA 2010 did not affect this reduction in the gift tax rate”

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HueyLD
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by HueyLD » Wed Nov 21, 2018 2:37 pm

IRS has the answer finally in IR-2018-229:

"Treasury, IRS: Making large gifts now won’t harm estates after 2025

WASHINGTON – Today the IRS announced that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA). As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025."

Happy Thanksgiving!

Leesbro63
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by Leesbro63 » Wed Nov 21, 2018 8:05 pm

HueyLD wrote:
Wed Nov 21, 2018 2:37 pm
IRS has the answer finally in IR-2018-229:

"Treasury, IRS: Making large gifts now won’t harm estates after 2025

WASHINGTON – Today the IRS announced that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA). As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025."

Happy Thanksgiving!
Interesting news. Thanks for posting the follow up!

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HueyLD
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Re: Potential Claw-Back from IRS of Gifted Assets

Post by HueyLD » Thu Nov 22, 2018 7:55 am

Forgot to post a link to the proposed regulation.

https://www.federalregister.gov/documen ... ion-amount

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