Understanding the Proposed Exception to Basic Exclusion Amount

On April 27, 2022, Treasury and the IRS issued proposed regulations amending the rules on the basic exclusion amount (BEA) used in computing federal estate and gift taxes. These regulations are particularly important for estates of decedents who made substantial gifts during the period when the higher BEA was available.

The 2017 Tax Cuts and Jobs Act increased the BEA from $5 million to $10 million (adjusted for inflation). However, under current law, the BEA is scheduled to revert to $5 million (adjusted for inflation) on January 1, 2026. In 2019, the IRS issued regulations ensuring that estates would not be penalized for gifts made while the higher BEA was in effect.

The new proposed regulations introduce an exception for what they term 'includible gifts,' which are gifts that are brought back into the gross estate at death. The exception prevents taxpayers from receiving the benefit of the higher BEA on gifts that are ultimately treated as testamentary transfers rather than completed lifetime gifts.

With the BEA reduction approaching, individuals and families with significant estates should consult with experienced tax counsel to evaluate whether making gifts before the reduction date could provide meaningful estate tax savings. The interaction between the current and future BEA amounts, along with the new exception rules, requires careful analysis specific to each family's situation.