IRS Issues Final Regulations Protecting Gifts Utilizing Enhanced Exemption Amounts

In a recent release, the IRS announced the release of final regulations under IRC § 2010.¹ The new final regulations largely adopt the previous proposed regulations published last November.² The final regulations were released in Treasury Decision 9884 on November 22, 2019 and effective on and after November 26, 2019. I previously wrote about the proposed regulations in a prior article.³

The final regulations adopt the proposed regulations from November 2018 and provide additional examples illustrating how the rules will operate in application.

Items Addressed in Regulatory Commentaries

Following release of the proposed regulations in 2018, commentary was opened to the public prior to issuance of final regulations. The final regulations contained commentary and explanations of revisions addressing the comments from the public.

Inflation Adjustments (Modifications to Examples to Include Inflation)

Commenters noted that the example in the proposed regulations did not reflect the annual inflation adjustments to the basic exclusion amount. Following commentary, the examples now include hypothetical inflation-adjusted basic exclusion amounts.⁴

Deceased Spouse Unused Exemption (Modifications to Examples to Reflect Effect on DSUE)

Commenters also asked for confirmation that, even if the amount of the basic exclusion amount that is allowable under IRC § 2010(c)(3) decreases after 2025, a DSUE amount elected during the period of the enhanced basic exclusion amount should not be reduced as a result of the sunset. The final regulations, in Examples 3 and 4 of § 20.2010-1(c)(2)(iii) and (iv), respectively now address this issue and make clear that an increased DSUE amount received by virtue of the enhanced basic exclusion amount will not be reduced as a result of the sunset.

Basic Exclusion Amount Computations (Addressing Application of BEA and DSUE)

The final regulations also clarify how to determine the extent to which a credit allowable in computing gift tax payable is based solely on the basic exclusion amount. Particularly, the ordering is specified as follows:

1. The credit may not exceed the amount necessary to reduce the gift tax for that calendar period to zero.
2. Any DSUE amount available to the decedent for that calendar period is deemed to be applied to the decedent’s gifts before any of the decedent’s basic exclusion amount is applied to those gifts.
3. In a calendar period in which an applicable exclusion amount allowable with regard to gifts made during that period includes both DSUE and basic exclusion amount, the allowable basic exclusion amount may not exceed that necessary to reduce the tentative gift tax to zero after the application of the DSUE amount.
4. In a calendar period in which the applicable exclusion amount allowable with regard to gifts made during that period includes both DSUE and the basic exclusion amount, the portion of the credit based solely on the basic exclusion amount for that period is that which corresponds to the result of dividing the basic exclusion amount allocable to those gifts by the applicable exclusion amount allocable to those gifts.⁵

GST Tax

Some commenters asked for confirmation that, during the increased basic exclusion amount period, donors may make late allocations of the increase in GST exemption to inter vivos trusts created prior to 2018. The explanations section of the final regulations acknowledge the increase in GST exemption, by virtue of the definition by reference to the basic exclusion amount, but stated that the effect and explanation requests is beyond the scope of the rulemaking.

Anti-Abuse

It was acknowledged that a provision providing anti-abuse rules would be within the scope of regulatory authority and such anti-abuse provision would benefit from prior notice and comment. Specifically, such a rule would address transfers made during the increased basic exclusion amount period that are not true inter vivos transfers, but rather are treated as testamentary transfers for transfer tax purposes.

Conclusion

The final regulations largely adopt the terms of the proposed regulations. The changes occurring between the proposed and final regulations appear to be reflected in the examples of the final regulations which address inflation adjustments, DSUE application and effects of special rules on DSUE, and explanation of the ordering of different types of credit (DSUE or basic exclusion amount). Given that each democratic presidential candidate proposes to either repeal the TCJA changes to the estate tax regime (Joe Biden, Elizabeth Warren, and Pete Buttigieg) or reduce thresholds (Bernie Sanders and Kamala Harris), an effective sunset could occur sooner than 2026.⁶ For the interim however, these rules provide helpful guidance in that the rule still very much is “use it or lose it.”

Joshua W. Sage, J.D., LL.M.

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1. See IR-2019-189 (Nov. 22, 2019)
2. See 83 FR 59343 (Text of Proposed Regulations)
3. Joshua W. Sage, J.D., LL.M., IRS Addresses Estate and Gift Tax Exemption “Claw-Back” (2018).
4. See Examples 1 and 2 of § 20.2010-1(c)(2)(i) and (ii)
5. See Example 4 of 20.2010-1(c)(2)(iv).
6. See Martin A. Sullivan, Tax Notes Federal, Democratic Tax Proposals on One Page (Nov. 18, 2019).