{"id":6660,"date":"2019-02-22T12:06:46","date_gmt":"2019-02-22T17:06:46","guid":{"rendered":"http:\/\/resources.evans-legal.com\/?p=6660"},"modified":"2019-02-22T12:08:50","modified_gmt":"2019-02-22T17:08:50","slug":"comments-on-proposed-regulations-on-exclusion-amount-changes","status":"publish","type":"post","link":"https:\/\/resources.evans-legal.com\/?p=6660","title":{"rendered":"Comments on Proposed Regulations on Exclusion Amount Changes"},"content":{"rendered":"\n

[The following is the text of the comments (with some corrections for typographical errors) I have submitted to the Treasury Department on the proposed regulation that addresses changes in the federal estate tax exclusion amount<\/a> under the tax reconciliation act of 2017, often known as the Tax Cuts and Jobs Act. These and other comments can be found on the <\/em>Regulations.gov<\/em><\/a> website.]<\/em><\/p>\n\n\n\n

February 21, 2019<\/p>\n\n\n\n

CC:PA:LPD:PR (REG\u2013106706\u201318)
Internal Revenue Service, Room 5203
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044

Via http:\/\/www.regulations.gov<\/a> (IRS REG-106706-18)
<\/p>\n\n\n\n

Re:      Comments\non Proposed Regulations;
\n83 F.R. 59343 (11\/23\/2018)<\/p>\n\n\n\n

Dear Sirs and Madams:<\/p>\n\n\n\n

I am submitting the following comments regarding the proposed\namendments to Treas. Reg. \u00a7 20.2010-1.<\/p>\n\n\n\n

Summary<\/h3>\n\n\n\n

I oppose the adoption of Prop. Reg. \u00a7 2010-1(c), and ask that the proposed regulation be withdrawn,\nand that a new regulation be proposed and adopted that would provide that the\n\u201caggregate amount of tax which would have been payable under chapter 12\u201d in\naccordance with I.R.C. \u00a7 2001(b)(2) be\ncalculated for the deaths of decedent dying after 2025 without regard to I.R.C.\n\u00a7 2010(c)(3)(C) (i.e., as though the $10 million basic exclusion amount had\nnever been enacted).<\/p>\n\n\n\n

I also ask that similar gift tax regulations be proposed and\nadopted to make a similar change in the calculation of \u201cthe sum of the amounts\nallowable as a credit to the individual under this section for all preceding\ncalendar periods\u201d in accordance with I.R.C. \u00a7 2505(a)(2), so that after 2025 the amounts previously allowed as a\ncredit would be recalculated without regard to I.R.C. \u00a7 2010(c)(3)(C) (i.e., as\nthough the $10 million basic exclusion amount had never been enacted).<\/p>\n\n\n\n

My Background<\/h3>\n\n\n\n

I have been practicing law in the area of estates and trusts\nfor more than forty years and am, among other things, a fellow of the American\nCollege of Trust and Estate Counsel and a past chair of the Real Property,\nProbate and Trust Law Section of the Pennsylvania Bar Association.<\/p>\n\n\n\n

While practicing law, I have also been constructing\nelectronic spreadsheets and writing computer programs for calculating estate\nand gift taxes, and writing books and articles about the mathematics of estate\ntax calculations.  For example, I have served\nas a technical consultant to Leimberg & LeClair, publishers of the\nNumberCruncher program for tax and financial calculations, and have most\nrecently begun publishing \u201cWebcalculators\u201d (http\/\/:www.wcalcs.com), which is my\nown \u201ccloud based\u201d on-line tax and financial calculator.<\/p>\n\n\n\n

Additional information about my writings, background, and\nexperience can be found at http:\/\/resources.evans-legal.com\/?page_id=151<\/a>.<\/p>\n\n\n\n

The comments below are entirely my own, and should not be\ntaken to represent the views of any other individual or organization. <\/p>\n\n\n\n

Proposed Regulations<\/h3>\n\n\n\n

So that these comments may be as concise as possible, I will\nnot restate the information about the mechanics of gift estate tax calculations\nand legislative history that is found in the \u201csupplementary information\u201d\nincluded with the proposed regulations, and I will presume that the reader is\nfamiliar with the issues presented by that supplementary information and the\nproposed regulations.  (I will also try\nto use the same terminology used in the proposed regulations.)<\/p>\n\n\n\n

I generally agree with the explanations and information in\nthe supplementary information.  However,\nthe examples that are provided all speak exclusively in terms of a basic\nexclusion amount (BEA) of either $5 million or $10 million, and do not include\nany examples with the adjustments for inflation that have been made to the BEA\nin the past, are in effect today, and will be made in the future in accordance\nwith I.R.C. \u00a7 2010(c)(3)(B).  As explained below, the inclusion of\ninflation adjustments in the examples will expose issues that need to be considered,\nand should addressed by the regulations.<\/p>\n\n\n\n

Specifically, I agree that the increase in the BEA does not cause any problems, as explained in sections V.2 and V3 of the supplementary information (83 F.R. at 59345).\u00a0 However, the proposed regulation eliminates any increase in estate tax caused by the decrease in the BEA only if you either (a) ignore future inflation adjustments or (b) assume that donors who make gifts that take advantage of the increased BEA during the \u201cincreased BEA period\u201d (decedents dying, and gifts made, after December 31, 2017, and before January 1, 2026) should not be entitled to any benefit from any inflation adjustments to the $5 million BEA following the end of the increased BEA period, because the proposed regulation will eliminate or greatly restrict the benefit of those future inflation adjustments.<\/p>\n\n\n\n

Inflation Adjustments<\/h3>\n\n\n\n

The proposed regulation would eliminate any estate tax after\nthe end of the increased BEA period on lifetime gifts in excess of the BEA, but\nit would also eliminate any benefit for inflation adjustments to the BEA after\ngifts are made that exceed the $5 million BEA, at least until the inflation\nadjustments to the BEA exceed the total of the gifts made that were sheltered\nfrom gift tax by the $10 million BEA.<\/p>\n\n\n\n

To illustrate, assume that an individual, \u201cA,\u201d who is not\nmarried and has never been married (so there is no DSUE), makes $12 million in\ntaxable gifts in 2018, when the BEA (adjusted for inflation) is\n$11,180,000  A would pay gift tax of\n$328,000 on the $820,000 of gifts in excess of the BEA.  In 2027, after the BEA has returned to $5\nmillion, the BEA could be $6,580,000 after adjusting for inflation of about\n1.8% per year.  If A dies in 2027 with a\ntaxable estate of $1,000,000, the BEA for A\u2019s estate would be $11,180,000 under\nthe proposed regulation, which would eliminate any estate tax on the lifetime\ngifts.  But the entire $1,000,000 taxable\nestate would be subject to estate tax, resulting in a tax of $400,000, even\nthough there were inflation adjustments to the BEA after the gifts were made in\n2018 and after the $10 million BEA ended after 2025.  If the $10 million BEA had not been enacted,\na 1.8% inflation rate would have resulted in a BEA of $6,340,000 in 2025, and\nthere would be additional BEA increases of $120,000 in both 2026 and 2027, and\nyet that total increase of $240,000 would have no effect on the calculation of\nthe decedent\u2019s estate tax.<\/p>\n\n\n\n

Not having the benefit of inflation adjustments after the BEA\nreverts to $5 million is contrary to previous tax policy, because normally a\ndonor is entitled to increases in the BEA even after gifts have been made that\nhave used up the BEA.  So, for example,\nwhen the BEA increased from $5,450,000 in 2016 to $5,490,000 in 2017, donors\ncould make tax-free taxable gifts of $40,000 even if they had already used up\nthe exclusion of $5,450,000 in 2016.<\/p>\n\n\n\n

There are several references to inflation adjustments in both\nthe supplementary information and the proposed regulations themselves, and yet\nnone of the examples in the proposed regulations use an inflation-adjusted BEA\nand so only refer to a $5 million or $10 million BEA.  It is therefore not clear whether the effect\nof the proposed regulations on tax calculations with inflation adjustments was\nnot considered, or was considered and the decision was made that the effect of\ninflation adjustments should be ignored.<\/p>\n\n\n\n

The \u201cPrior Gifts\u201d Alternative<\/h3>\n\n\n\n

An alternative to adjusting the BEA for a decedent dying\nafter 2025, as in the proposed regulations, is to adjust how the \u201cgift tax\npayable\u201d on lifetime gifts is calculated under I.R.C. \u00a7 2001(b).  (And this may\nhave been what Congress was contemplating when it enacted \u00a7 2001(g)(2), which refers to\nregulations on the difference between the exclusion at the decedent\u2019s death and\nthe exclusion applicable to gifts by the decedent.)<\/p>\n\n\n\n

Briefly, regulations could provide that, when the gift tax\npayable on lifetime gifts is recalculated in accordance with \u00a7 2001(b)(2) for deaths after 2025,\nthe BEA that is used for each year of those calculations should be the BEA that\nwould have been in effect (including adjustments for inflation) if the $10 million basic exclusion amount had\nnever been enacted.<\/p>\n\n\n\n

There is legislative\nhistory that supports this approach.<\/p>\n\n\n\n

When the BEA was increased to $5 million by the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010, the increase was still subject to the \u201csunset\u201d provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and there was a concern by practitioners and commentators that there would be estate tax on gifts made using that increased BEA if Congress allowed the increase to lapse.\u00a0 The estate tax would be the result of the same problem discussed in the explanations of the proposed regulations, and was often called a \u201cclawback\u201d tax on the gifts.\u00a0 However, the sunset provision of EGTRRA stated that, if the changes made by that act ceased to apply, the Internal Revenue Code would then be applied and administered as though the changes \u201chad never been enacted.\u201d\u00a0 If the \u201cgift tax payable\u201d on lifetime gifts is calculated under section 2001(b) as though the $5 million exclusion amount had never been enacted, then the gift tax payable would be calculated using a $1 million BEA instead of a $5 million BEA, and the resulting (hypothetical) gift tax would eliminate any \u201cclawback\u201d tax on lifetime gifts that used the larger BEA.\u00a0 For additional explanations and examples, see my articles \u201cComplications from Changes in the Exclusion,\u201d<\/a> Steve Leimberg\u2019s Estate Planning Newsletter # 1768 (1\/31\/2011), and \u201cClawback Has No Teeth,\u201d<\/a> Steve Leimberg\u2019s Estate Planning Newsletter #1729 (2\/23\/2012), copies of which are attached.<\/p>\n\n\n\n

Although not specifically required by statute, because there\nis no similar \u201csunset\u201d language for \u00a7\n2010(c)(3)(C), this same approach should be applied to the temporary\nincrease in the BEA.<\/p>\n\n\n\n

If the gift tax payable on lifetime gifts made using the $10\nmillion BEA is recalculated after 2025 using the $5 million BEA (i.e., the BEA\nthat would have applied if \u00a7\n2010(c)(3)(C) had never been enacted), then the estate tax on lifetime\ngifts is eliminated, and the estate would get the benefit of any inflation\nincreases to the BEA that might have occurred after the gifts.<\/p>\n\n\n\n

So, going back to the example above of a $12 million gift in\n2018, and the decedent\u2019s death in 2027 with a $1 million estate, the BEA in\n2018 would have been $5,600,000 if the BEA had not been increased to $10\nmillion.  If that BEA is used the\ncalculate the gift tax payable on the $12 million gift for purposes of\ncalculating the estate tax in 2027, then the gift tax would be $2,560,000 instead\nof $328,000, and the estate tax on the $1,000,000 estate would be $8,000\ninstead of $400,000.  Of the tentative\ntax base of $13 million ($12 million gift plus $1 million taxable estate),\n$6,400,000 ($12,000,000 gift less presumed BEA of $5,600,000 in 2018) would be\nsheltered by having been subject to gift tax in 2018, and $6,580,000 would be\nsheltered by the BEA in 2027, leaving only $20,000 subject to estate tax.<\/p>\n\n\n\n

Even if it is determined that donors should not get any\nbenefit from unused inflation adjustments before 2026, but only inflation\nadjustments after 2025, it is still possible to achieve that result by\nrecalculating the gift tax payable for taxable gifts before 2026 using either\nthe BEA that would have been in effect at the end of 2025 if the $10 million\nBEA had not been enacted.  Using the same\ninflation adjustments described above, the BEA would have been $6,340,000 in\n2025 if the $10 million BEA had never been enacted.  If the gift tax payable on the 2018 gift of\n$12 million is recalculated using that BEA instead of the $11,180,000 BEA in\neffect in 2018, the gift tax payable would be $2,264,000, and the estate tax on\nthe $1,000,000 estate would be $304,000 instead of the $400,000 required by the\nproposed regulations.  In effect, the\nestate would get the benefit of the $240,000 increase in the BEA in 2026 and\n2027, which would reduce the estate tax by $96,000 (40% of $240,000).<\/p>\n\n\n\n

The Alternative Is More Appropriate<\/h2>\n\n\n\n

The prior gifts alternative described above is the more\nappropriate regulatory solution, and should be adopted in lieu of the proposed\nregulation, for the following reasons:<\/p>\n\n\n\n