The IRS has released final regs that adopt the special rule provided in the proposed regs issued in November 2018 in cases where the portion of the credit against the estate tax that is based on the BEA is less than the sum of the credit amount attributable to the BEA allowable in computing gift tax payable.
Background—general
In computing the amount of federal estate tax to be paid at death, the gift and estate tax provisions of the Code apply a unified rate schedule to the taxpayer’s cumulative taxable gifts and taxable estate on death to arrive at a net tentative tax. (Code Sec. 2001(b))
The net tentative tax then is reduced by a credit based on the applicable exclusion amount (AEA), which is the sum of the basic exclusion amount (BEA) within the meaning of Code Sec. 2010(c)(3) and, if applicable, the deceased spousal unused exclusion (DSUE) amount within the meaning of Code Sec. 2010(c)(4).
Section 11061 of the Tax Cuts and Jobs Act, (TCJA, PL 115-97) amended Code Sec. 2010(c)(3) to provide that for decedents dying and gifts made after December 31, 2017, and before January 1, 2026, the BEA is increased from $5 million, adjusted for inflation, to $10 million adjusted for inflation (Increased BEA). On January 1, 2026, the BEA will revert to $5 million as adjusted for inflation.
Background—proposed regs.
On November 23, 2018, the IRS issued proposed regs (Preamble to Prop Reg REG-106706-18), which provided a “special rule,” that ensured that a decedent’s estate would not be inappropriately taxed with respect to gifts that were sheltered from gift tax by the increased BEA when made. See Prop regs would protect pre-2026 gifts from post-2025 drop in exclusion amount (11/23/2018).
Final regs
The final regs adopt the proposed regs, but provide additional examples illustrating how the rules will operate.
The final regs provide that in computing the estate tax, the Increased BEA is applied first against the decedent’s taxable gifts. To the extent any BEA remains at death, it is applied against the decedent’s estate. Therefore, in the case of a decedent who had made enough gifts to cause the total BEA allowable in the computation of gift tax payable to equal or exceed the date of death BEA (as adjusted for inflation) there is no remaining BEA available to be applied to reduce the estate tax. (Reg §20.2010-1(c)(2)(i), Example 1)
Thus, the “special rule” does not change the five-step estate tax computation required under Code Sec. 2001(b) or the fact that, under that computation, only the credit that remains after computing gift tax payable may be applied against the estate tax. (Reg §20.2010-1(c)(2)(i), Example 1)
The application of the “special rule” is based on actual gifts and, thus, does not apply to a decedent who did not make gifts in excess of the date of death BEA (as adjusted for inflation). (Reg §20.2010-1(c)(2)(ii), Example 2)
The final regs provide that, if a spouse dies during the Increased BEA period, and the deceased spouse’s executor makes the portability election, the surviving spouse’s applicable exclusion amount (AEA) includes the full amount of the DSUE that is based on the deceased spouse’s increased BEA. This DSUE amount is available to offset the surviving spouse’s transfer tax liability regardless of when the transfers are made, whether during or after the increased BEA period. (Reg §20.2010-1(c)(2)(iii) and Reg §20.2010-1(c)(2)(iv), Examples 3 and 4)
The final regs also address the application of the DSUE ordering rule as well as the computation of the credit based solely on the BEA in a calendar period in which the transfer exhausts the remaining DSUE amount with the result that the BEA is also allowable. (Reg §20.2010-1(c)(2)(iv), Example 4)
Finally, the final regs generally provide that for any decedent dying after December 31, 2010, and before January 1, 2018, the BEA is the sum of (i) $5,000,000; and (ii) $5,000,000 multiplied by the cost-of-living adjustment determined under Code Sec. 1(f)(3) for the calendar year of the decedent’s death and rounding to the nearest multiple of $10,000. (Reg §20.2010-1(e)(3)(i) and Reg §20.2010-1(e)(3)(ii))
For any decedent dying after December 31, 2017, and before January 1, 2026, the BEA is the sum of $10,000,000 multiplied by the cost-of-living adjustment determined under Code Sec. 1(f)(3) for the calendar year of the decedent’s death and rounded to the nearest multiple of $10,000. (Reg §20.2010-1(e)(3)(iii))
Applicability dates.
Generally, except as provided below, the final regs apply to the estates of decedents dying after June 11, 2015. For the rules applicable to estates of decedents dying after December 31, 2010, and before June 12, 2015, see Reg §20.2010-1T, revised as of April 1, 2015. (Reg §20.2010-1(f)(1))
Reg §20.2010-1(c) and Reg §20.2010-1(e)(3) apply to estates of decedents dying on and after November 26, 2019. However, Reg §20.2010-1(e)(3) may be applied by estates of decedents dying after December 31, 2017, and before November 26, 2019. For the explanation of the basic exclusion amount applicable to estates of decedents dying after June 11, 2015, and before January 1, 2018, see Reg §20.2010-1(d)(3), revised as of April 1, 2019. (Reg §20.2010-1(f)(2))
To continue your research on the estate/gift tax exclusion amount, see Federal Tax Coordinator 2d ¶R-7100; United States Tax Reporter Estate & Gift ¶20,104.
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