What "lifetime" gift exclusion amount applies?

My guess is that if you make the gift and you die within three years, I believe the current exemption amount will apply. If you live more than three years the amount of credit allowed in the year of death is the one to apply.

Stu

The estate of the deceased is responsible for paying the estate tax, not the recipient. You did not imply otherwise, I just wish to stress this point. If I gift and claim $3M today, there is no gift tax, and this amount is well under the estate tax limit (of $11.2M) for an individual. At a $1M exemption, with $2M subject to tax, say 40%, $800K would be due. For easy math I could go up to an even $11M gift where $4M would be due if the exemption were back at $1M.

It's fair to say that if the paperwork is all done correctly, you are left with no further exemption on your death. In your scenario, you've gifted, and claimed exemptions, then in effect, but no longer, no no remaining exemption. But, I am 99.9% sure, there can be no claw-back, what's already gifted, legitimately under the former rules, would not be subject to gift tax.

Why so sure? Political answer - because the few that are subject to this tax, fewer, now far fewer than .1% of estates of the deceased, are the ones who own congress, they would not let a look-back happen.

Plain answer - historically, this type of change does not include the look-back. And implementation, potentially destroying the lives of multiple beneficiaries who acted in good faith, would be too painful. Just my opinion on this portion.

I looked at your scenario once before, got frustrated, and finally looked at the logic of the current estate tax form 706 to try and figure out what might happen. My analysis may be wrong or form 706's logic may not give the correct result if the lifetime estate/gift exclusion is reduced so I would love feedback about what is wrong with my general understanding as stated below.

Today, when you give a large gift and do not exceed the current lifetime estate/gift exclusion you really do not know if the gift will ultimately be tax free (although there is no tax currently due). The gifted amount will be added to the estate assets when determining the final estate tax so the gift will eventually be taxed according to the estate tax rules and rates at the time of death. As long as the lifetime estate/gift exclusion stays steady or goes up this approach works fine and gives the results people expect.

If the lifetime estate/gift exclusion is ever lowered significantly without Congress taking account of possible side effects, you can get some odd results. For example: If you give away $3M in 2018 and properly file the correct paperwork you will currently own no gift tax. Suppose the lifetime estate/gift exclusion is changed to $1M (with no other estate law changes) after

2018 and you die with $1M in 2024. Your executor will end up with a $4M gross estate ($3M from the gift in 2018), a $1M estate/gift exclusion, a $1.2M estate tax bill (assuming 40%), and $1.0M to pay the tax. The estate obviously can't pay the full bill and I don't see how anybody else can be made to pay. If an estate can't pay the bill, is there anyway for the IRS to claw back gifts from individuals or charities? If so, how far back can they look?

My answer your original question: It will depend on how Congress decides to handle your scenario when they reduce the lifetime estate/gift tax exclusion. There really is no definitive answer to your question.

This is one of the frustrating parts of the death tax in general - you are making provisions today for a tax down the road that you have no way of knowing what its terms will be at that time.

Many people "wisely" set up trusts when the exclusion was $600k, only to find that all that extra effort, tax returns, etc. was unnecessary when they dies with the exclusion being $5M. But how could they know? And many lost a step up in basis because they put assets in trust, fixing their basis at that date.

We really should go to the Canadian version (death tax = capital gains tax on all as yet unrecognized gains), and stick with it.

That's an excellent analysis, and it gave me a headache trying to think it through. Generally when a law changes to become more burdensome, things that were done under the prior law are generally grandfathered (though it's not required).

You're right, it depends on what Congress does. But my best guess of what they would do (based on past similar actions) is that the past gift would not be fully counted in the later estate. With the possible exception that the three-year rule might bring it back irrespective of whether it was within the exempt amount when given or not.

If you pay attention you can usually change your plan if the law changes.

I don't know what kind of trust you're usuing, but normal estate planning trusts don't require any additional tax returns until one spouse dies. And any loss in the step up of basis only happens after one spouse dies as well. It's important to be careful when, after one spouse dies, that you allocate assets to the correct trust. I've seen people lose the homeowner's exemption by putting that asset in the wrong trust. But for the most part changing an estate plan when the law changes is a workable solution.

Yes, but it just adds to the burden. And this is generally only possible for revocable trusts.

If you didn't need to use the trust after the first spouse dies, you would get the full step up when the second spouse dies (in community property states). And there are plenty of reasons some folks fund irrevocable trusts before death.