IRS proposes to amend estate and gift tax basic exclusion regs.

The IRS issued proposed regulations Tuesday (REG-118913-21) that would provide an exception to the anti-“clawback” special rule that preserves the benefits of the temporarily higher gift and estate basic exclusion amount. The regulations would apply to certain transfers that are includible, or treated as includible, in a decedent’s gross estate under Sec. 2001(b).

Specifically, the proposed regulations would add a provision at Regs. Sec. 20.2010-1(c)(3), which was reserved for that purpose in final regulations issued in 2019 (T.D. 9884). Those final regulations addressed situations where the basic exclusion amount that applies at the time of a decedent’s death differs from the exclusion amount that applied with respect to any gifts made by the decedent.

This disparity occurred — and is scheduled to occur again, in reverse — as a result of the legislation known as the Tax Cuts and Jobs Act, P.L. 115-97, which temporarily increased the basic exclusion amount from $5 million to $10 million, both adjusted for inflation, for decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026 (when it will revert to the lower level).

The 2019 final regulations ensured, in part, that the currently higher exclusion amount applied to gifts would not then be “clawed back” from the estate of a decedent subject to a future lower exclusion amount. For that purpose, they included Regs. Sec. 20.2010-1(c), which provides a special rule that applies when the credit against estate tax attributable to the basic exclusion amount is less at the date of death than the sum of credits attributable to the basic exclusion amount allowable in computing gift tax payable with regard to gifts the decedent made in his or her lifetime (after 1976).

In that case, the special rule provides, the portion of the credit allowable in computing the estate tax that is attributable to the basic exclusion amount is the sum of the amounts attributable to the basic exclusion amount allowable as a credit in computing the gift tax payable on the decedent’s lifetime gifts.

Left for later in the 2019 final regulations was the question of how to handle for purposes of the special rule gifts that are not true inter vivos (during lifetime) transfers but are includible, or treated as includible, in the decedent’s gross estate. The proposed regulations issued Tuesday would address that question by providing an exception to the special rule for such transfers, as well as certain eliminations and relinquishments, including:

Gifts subject to a retained life estate or subject to other powers or interests as described in Secs. 2035 through 2038 and Sec. 2042;
Gifts made by enforceable promise, to the extent they remain unsatisfied as of the date of death;

Transfers of certain applicable retained interests in corporations or partnerships (Sec. 2701) or trusts (Sec. 2702); and
Transfers that would have been described in the preceding three bullet points but for the transfer, relinquishment, or elimination of an interest, power, or property, effectuated within 18 months of the date of the decedent’s death, by the decedent in conjunction with any other person, or by any other person.

The special rule would continue to apply to transfers includible in the decedent’s gross estate where the taxable amount is 5% or less of the total amount of the transfer, valued as of the date of the transfer. It would also apply to transfers, relinquishments, or eliminations described in the final bullet point above that are effectuated by the termination of a period described in the original instrument of transfer by either the passage of time or the death of any person.

The proposed regulations would apply to the estates of decedents dying on or after the date they are published as final. Comments and requests for a public hearing may be submitted as directed in the proposed regulations’ preamble.

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