In December 2017, the Tax Cuts and Jobs Act (the TCJA) was passed, resulting in significant changes across the board for federal taxes: there were changes to individual income tax rates and available deductions, corporate tax rates were cut, major changes were introduced affecting international taxes, and there were big changes affecting estate and gift taxes as well.

The TCJA resulted in an increase in the credit for estate and gift taxes from $5 million to $10 million, both adjusted for inflation (meaning that the first $10 million transferred by gift or bequest is exempt from taxation and anything in excess is subject to a 40% tax on the net value of the gratuitously transferred asset). For 2020, an individual has a credit amount of $11.58 million, which means that the estate and gift tax has effectively been eliminated for all but a very narrow segment of the population. The increase, however, only lasts through 2025, and in 2026 the estate and gift tax credit reverts back to approximately $5 million.

The estate and gift tax credit is applied to lifetime gifts up to the full credit amount and any balance is applied at death. Another important concept to understand is that "portability" is available for the unused portion of a decedent's exclusion amount, which may be transferred to the surviving spouse (exclusively).

Many tax and estate planning professionals have been advising their clients to take advantage of the increased exclusion amount by making lifetime gifts prior to the sunset of the increased credit amount. The future of the exclusion amount depends on who is in political office, and in a client's lifetime we cannot predict in which direction the exclusion amount will head, notwithstanding the scheduled sunset of the increased amount in 2026.

With the uncertainty of the future of the exclusion amount, what is the best way to use a guaranteed $11.58 million exclusion amount that is known and available today? For those who are in good health, who would not be expected to die prior to the reversion to the $5 million exclusion amount in 2026, using the exclusion amount as a credit for lifetime gifts is a good way to hedge against an exclusion amount that could be drastically lowered on a future date of death.

When the TCJA was first passed, it was unclear whether lifetime gifts made using the increased exclusion amount would ultimately be taxed at death to the extent the exclusion amount decreased after 2025. To clarify this matter, on Nov. 23, 2018, the IRS issued proposed regulations with rules that would prevent the inappropriate taxation of lifetime gifts made using the increased exclusion amount. Proposed regulations, although a good indication of the outcome intended by the government, are not final law, which is why it was a great relief when final regulations were published in November 2019. The final regulations adopted the proposed regulations, confirming that the higher of the exclusion amount used to offset lifetime gifts or the exclusion amount available at death will be applied, and provided examples of how the rules affecting lifetime gifts using the increased credit amount would be treated.

For example, assuming no prior gifts, if an individual makes an $11 million gift in 2020 and dies in 2027 with a gross estate of $8 million, assuming the exclusion amount has been decreased to approximately $5 million, the individual will have no remaining exclusion amount to offset the estate taxes and will be taxed on the full value of the estate, but the individual will have made use of an $11 million exclusion amount during the individual's lifetime and will not be retroactively subject to taxation on the lifetime gifts made in excess of the credit amount on the date of death.

Additionally, if a spouse dies with, for instance, a gross estate of $2 million in 2020 and makes a portability election to transfer the remaining $9.58 million 2020 exclusion amount to the surviving spouse, the surviving spouse will be credited for the entire transferred amount, which will be added to the exclusion amount available on the date of the surviving spouse's death. This is a tremendous benefit, as it enables the surviving spouse to grandfather in the deceased spouse's exemption regardless of any change in the law.

In a published statement, and as evidenced by the final regulations, the IRS has made it clear 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." Although 2026 seems far away, it is never too early to start considering one's options and planning. Fortunately, the much-needed clarification under the regulations provides more clarity to facilitate planning.

Elysa Merlin is a tax associate with Dorot & Bensimon in Aventura. She focuses primarily on international and domestic wealth planning.