‘Clawback’ Concerns Linger Under New Tax Law

The new tax reform package increases an individual’s lifetime exemption from roughly $5.5 million to $11.2 million, with an expiration date of December 31, 2025.

For individuals who don’t expect to die in the next eight years, your gift strategy could include protecting assets from future estate taxes while still maintaining adequate resources for your lifetime. You may, for example, choose to max out your lifetime exemption now, while you are still alive, to minimize the tax burden on your heirs when you die.

Let’s assume you are a high-net worth individual with no surviving spouse. If you give your kids $11.2 million now, they receive those funds completely tax free. If you give them $5.5 million now, and they receive another $5.7 million when you die in 2026, your heirs would have to pay a 40% estate tax on that $5.7 million.

However, making a gift of the $11.2 million now does create a “clawback” concern if you die in 2026, when the gift tax exemption is lower. It’s unclear if the IRS will apply the gift tax exemption amount applicable at the time of the gift or at the time of your death.

Congress attempted to address this issue, but analysts disagree over how the relevant language should be interpreted. Some advisors feel confident that the new law directs the Treasury to issue regulations clarifying that gifts made prior to 2026 will not be clawed back and rendered taxable. Others suggest that the language is ambiguous enough to leave room for interpretation.

What’s more, high-net worth individuals should be aware that the new lifetime exemption limit could change if political power shifts. If President Donald Trump loses the 2020 election and the Democrats gain control of Congress, the law could be changed and limits lowered before the 2025 expiration date.

It’s important to discuss the implications of this uncertainty for your estate plan with your estate planning lawyer.