Estate and Gift Taxes; Difference in the Basic Exclusion Amount

 
CONTENT
Federal Register, Volume 84 Issue 228 (Tuesday, November 26, 2019)
[Federal Register Volume 84, Number 228 (Tuesday, November 26, 2019)]
[Rules and Regulations]
[Pages 64995-65000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25601]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 20
[TD 9884]
RIN 1545-B072
Estate and Gift Taxes; Difference in the Basic Exclusion Amount
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations addressing the effect
of recent legislative changes to the basic exclusion amount allowable
in computing Federal gift and estate taxes. The final regulations will
affect donors of gifts made after 2017 and the estates of decedents
dying after 2025.
DATES:
    Effective Date: These final regulations are effective on and after
November 26, 2019.
    Applicability Date: For date of applicability, see Sec.  20.2010-
1(f)(2).
FOR FURTHER INFORMATION CONTACT: Deborah S. Ryan, (202) 317-6859 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
    Section 11061 of the Tax Cuts and Jobs Act, Public Law 115-97, 131
Stat. 2504 (2017) (TCJA) amended section 2010(c)(3) of the Internal
Revenue Code (Code) to provide that, for decedents dying and gifts made
after December 31, 2017, and before January 1, 2026, the basic
exclusion amount (BEA) is increased by $5 million to $10 million as
adjusted for inflation (increased BEA). On January 1, 2026, the BEA
will revert to $5 million as adjusted for inflation.
    This document contains amendments to the Estate Tax Regulations (26
CFR part 20) relating to the BEA described in section 2010(c)(3) of the
Code. On November 23, 2018, a notice of proposed rulemaking (proposed
regulations) under section 2010 (REG-106706-18) was published in the
Federal Register (83 FR 59343). No public hearing was requested or
held. Written or electronic comments responding to the proposed
regulations were received. After consideration of all the comments,
this Treasury decision adopts the proposed regulations with certain
revisions. Comments and revisions to the proposed regulations are
discussed in the Summary of Comments and Explanation of Revisions.
    The final regulations adopt the special rule provided in the
proposed regulations in cases where the portion of the credit against
the estate tax that is based on the BEA is less than the sum of the
credit amounts attributable to the BEA allowable in computing gift tax
payable within the meaning of section 2001(b)(2). In that case, the
rule provides that the portion of the credit against the net tentative
estate tax that is attributable to the BEA is based upon the greater of
those two credit amounts. The rule thus would ensure that the estate of
a decedent is not inappropriately taxed with respect to gifts that were
sheltered from gift tax by the increased BEA when made.
Summary of Comments and Explanation of Revisions
1. Overview
    Most commenters agreed that the special rule would avoid an unfair
situation that otherwise could effectively vitiate the statutory
increase in the BEA during the period January 1, 2018, through December
31, 2025 (increased BEA period). These commenters also acknowledged
that the special rule would provide important clarification for
taxpayers. However, one commenter suggested an alternate approach and
two others disputed the regulatory authority to adopt the special rule.
Some commenters suggested technical changes. All of the other comments
were requests for clarification of the interaction of the special rule
with the inflation adjustments to the BEA, the deceased spousal unused
exclusion (DSUE) amount, and the generation-skipping transfer (GST)
tax, and requests for additional examples. These comments are discussed
in this preamble.
2. Inflation Adjustments
    Several commenters noted that the example in the proposed
regulations does not reflect the annual inflation adjustments to the
BEA, and requested clarification of the effect of those adjustments on
the application of the special rule. The inflation adjustments were not
included in that example for purposes of more simply illustrating the
special rule. However, by definition, the term BEA refers to the amount
of that exclusion as adjusted for inflation, so the Department of the
Treasury (Treasury Department) and the IRS agree that examples
including inflation adjustments would be appropriate. Accordingly, the
examples in the final regulations reflect hypothetical inflation-
adjusted BEA amounts.
    One commenter requested confirmation that under the special rule a
decedent does not benefit from the increased BEA, including inflation
adjustments, to the extent it is in excess of the amount of gifts the
decedent actually made, and agreed that this is the appropriate
interpretation of the statute. Specifically, the increased BEA as
adjusted for inflation is a ``use or lose'' benefit and is available to
a decedent who survives the increased BEA period only to the extent the
decedent ``used'' it by making gifts during the increased BEA period.
The final regulations include Example 2 in Sec.  20.2010-1(c)(2)(ii) to
demonstrate that the application of the special rule is based on gifts
actually made, and thus is inapplicable to a decedent who did not make
gifts in excess of the date of death BEA as adjusted for inflation.
    Commenters also sought confirmation that under the special rule a
decedent dying after 2025 will not benefit from post-2025 inflation
adjustments to the BEA to the extent the decedent made gifts in an
amount sufficient to cause the total BEA allowable in the computation
of gift tax payable to exceed the date of death BEA as adjusted for
inflation. This is confirmed in Example 1 of Sec.  20.2010-1(c)(2)(i)
of these final regulations. In computing the estate tax, the BEA, in
effect, is applied first against the decedent's gifts as taxable gifts
were made. To the extent any BEA remains at death, it is applied
against the decedent's estate. Therefore, in the case of a decedent who
had made gifts in an amount sufficient to cause the total BEA allowable
in the computation of gift tax payable to equal or exceed the date of
death BEA as adjusted for inflation, there is no remaining BEA
available to be applied to reduce the estate tax. The special rule does
not change the five-step estate tax computation required under sections
2001 and 2010 of the Code or the fact that, under that computation,
only the credit that remains after computing gift tax payable may be
applied against the estate tax.
[[Page 64996]]
    One commenter recommended that, where the BEA allowable in
computing gift tax payable exceeds the date of death BEA including
inflation adjustments, the special rule should permit the use of a BEA
equal to the sum of the BEA allowable in computing gift tax payable and
the post-2025 inflation adjustments. For the reasons discussed in the
preceding paragraphs, this recommendation is inconsistent with the
unified gift and estate tax statutes. If the BEA allowable in computing
gift tax payable exceeds the date of death BEA as adjusted for
inflation, under the special rule, the inflation adjustments already
have been allowable against taxable gifts and it would be inconsistent
with the estate tax statute to allow them again against the estate tax.
3. DSUE
    Several commenters asked for confirmation that, even if the amount
of BEA that is allowable under section 2010(c)(3) of the Code decreases
after 2025, a DSUE amount elected during the increased BEA period will
not be reduced as a result of the sunset of the increased BEA. Section
2010(c)(4) defines the DSUE amount as the lesser of the BEA or the
unused portion of the deceased spouse's applicable exclusion amount
(AEA) at death. The regulations in Sec. Sec.  20.2010-1(d)(4) and
20.2010-2(c)(1) confirm that the reference to BEA is to the BEA in
effect at the time of the deceased spouse's death, rather than the BEA
in effect at the death of the surviving spouse. A DSUE election made on
the deceased spouse's estate tax return allows the surviving spouse to
take into account the deceased spouse's DSUE amount as part of the
surviving spouse's AEA. Section 2010(c)(5); Sec.  20.2010-2(a). AEA is
the sum of the DSUE amount and the BEA. Section 2010(c)(2). A decrease
in the BEA after 2025 will reduce the surviving spouse's AEA only to
the extent that it is based upon the BEA, but not to the extent that it
is based on the DSUE amount. Therefore, the sunset of (or any other
decrease in) the increased BEA has no impact on the existing DSUE rules
and the existing regulations governing DSUE continue to apply. Examples
3 and 4 of Sec.  20.2010-1(c)(2)(iii) and (iv), respectively, of these
final regulations address this situation. The examples demonstrate
that, if a spouse dies during the increased BEA period, and the
deceased spouse's executor makes the portability election, the
surviving spouse's AEA includes the full amount of the DSUE that is
based on the deceased spouse's increased BEA. This DSUE amount is
available to offset the surviving spouse's transfer tax liability
regardless of when the transfers are made, whether during or after the
increased BEA period.
4. BEA Computations
    Several commenters raised questions concerning the calculation of
the credit amount solely attributable to the BEA in computing gift tax
payable where the AEA upon which the credits are based consists of
amounts other than the BEA. In response to these comments, the final
regulations clarify how to determine the extent to which a credit
allowable in computing gift tax payable is based solely on the BEA.
First, the credit may not exceed that amount necessary to reduce the
gift tax for that calendar period to zero. Second, any DSUE amount
available to the decedent for that calendar period is deemed to be
applied to the decedent's gifts before any of the decedent's BEA is
applied to those gifts. This is consistent with the existing ordering
rule concerning the application of DSUE to a given transfer. See
Sec. Sec.  20.2010-3(b) and 25.2505-2(b). Third, in a calendar period
in which the AEA allowable with regard to gifts made during that period
includes both DSUE and BEA, the allowable BEA may not exceed that
necessary to reduce the tentative gift tax to zero after the
application of the DSUE amount. Fourth, in a calendar period in which
the AEA allowable with regard to gifts made during that period includes
both DSUE and BEA, the portion of the credit based solely on the BEA
for that period is that which corresponds to the result of dividing the
BEA allocable to those gifts by the AEA allocable to those gifts.
Example 4 of Sec.  20.2010-1(c)(2)(iv) of these final regulations
addresses the application of the DSUE ordering rule as well as the
computation of the credit based solely on the BEA in a calendar period
in which the transfer exhausts the remaining DSUE amount with the
result that the BEA is also allowable.
    A commenter requested an example involving a taxable estate that
exceeds the available exclusion amount. Each of Examples 2, 3, and 4 of
Sec.  20.2010-1(c)(2)(ii), (iii) and (iv), respectively, of these final
regulations contemplates that the decedent's estate potentially is
taxable, and identifies the exclusion amounts upon which the credit
against the tentative estate tax is based.
    A commenter suggested that examples be provided regarding the
computation of the gift tax on gifts made during the increased BEA
period and after the sunset of that period. The computation of the gift
tax in both situations was discussed in detail in the preamble to the
proposed regulations. See part V.2., Effect of Increase in BEA on the
Gift Tax, and part V.4., Effect of Decrease in BEA on the Gift Tax, in
the Background section of the proposed regulations. That discussion
concludes that the existing seven-step gift tax computation required
under sections 2502 and 2505 of the Code appropriately applies in the
case of both increases and decreases in the BEA. Accordingly, there is
nothing that needs to be changed in the gift tax computation and thus,
no need for gift tax examples.
    Some commenters suggested a BEA ordering rule, similar to that for
DSUE, under which the increase in the BEA during the increased BEA
period over the BEA in effect in 2017 (base BEA) is deemed to be
allowable against gifts before the base BEA. They posited that this
would allow donors to utilize the increase in the BEA without being
deemed to have utilized the base BEA, so that the base BEA would remain
available for transfers made after 2025. Specifically, a $5 million
gift made during the increased BEA period would use the temporary
increase in the BEA and preserve or ``bank'' the base BEA of $5 million
so as to be available after 2025 for either gift or estate tax
purposes. This suggestion was not adopted for several reasons. First,
it is inconsistent with the sunset of the increased BEA in that it, in
effect, would extend the availability of the increased BEA beyond 2025.
As discussed in section 2 of this Summary of Comments and Explanation
of Revisions, Inflation Adjustments, the increased BEA is a ``use or
lose'' benefit that is available only during the increased BEA period.
Second, it is inconsistent with the cumulative structure of the unified
transfer tax regime. Under that regime, the BEA in effect for a
particular year is the exclusion allowable for cumulative purposes--
that is, for all prior taxable gifts and the current gift or taxable
estate. In the case of a donor or decedent who made prior gifts in an
amount at least equal to the post-2025 exclusion amount in effect in
the year of the current gift or death, there is no remaining BEA
available to be applied. Finally, as is explained in the preamble to
the proposed regulations, the existing seven-step gift tax computation
required under sections 2502 and 2505 of the Code appropriately adjusts
for gifts made in an earlier period during which the BEA differed from
the BEA in effect for a current gift. The suggested BEA ordering rule
would create the same sort of problem these final regulations are
designed to correct.
[[Page 64997]]
5. GST Tax
    Several commenters asked for confirmation that, during the
increased BEA period, donors may make late allocations of the increase
in GST exemption to inter vivos trusts created prior to 2018.\1\ An
increase in the BEA correspondingly increases the GST tax exemption,
which is defined by reference to the BEA. Section 2631(c). The effect
of the increased BEA on the GST tax is beyond the scope of this
rulemaking.
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    \1\ See Joint Comm. on Taxation, JCS-1-18, ``General Explanation
of Public Law 115-97,'' 89 (2018), indicating that a late allocation
of GST exemption (increased by the increase in the BEA) may be made
during the increased BEA period.
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    A commenter requested confirmation and examples showing that
allocations of the increased GST exemption made during the increased
BEA period (whether to transfers made before or during that period)
will not be reduced as a result of the sunset of the increased BEA.
There is nothing in the statute that would indicate that the sunset of
the increased BEA would have any impact on allocations of the GST
exemption available during the increased BEA period. However, this
request is beyond the scope of this project.
6. Anti-Abuse Rule
    A commenter recommended consideration of an anti-abuse provision to
prevent the application of the special rule to transfers made during
the increased BEA period that are not true inter vivos transfers, but
rather are treated as testamentary transfers for transfer tax purposes.
Examples include transfers subject to a retained life estate or other
retained powers or interests, and certain transfers within the purview
of chapter 14 of subtitle B of the Code. The purpose of the special
rule is to ensure that bona fide inter vivos transfers are not subject
to inconsistent treatment for estate tax purposes. Arguably, the
possibility of inconsistent treatment does not arise with regard to
transfers that are treated as part of the gross estate for estate tax
purposes, rather than as adjusted taxable gifts. An anti-abuse
provision could except from the application of the special rule
transfers where value is included in the donor's gross estate at death.
Although the Treasury Department and the IRS agree that such a
provision is within the scope of the regulatory authority granted in
section 2001(g)(2), such an anti-abuse provision would benefit from
prior notice and comment. Accordingly, this issue will be reserved to
allow further consideration of this comment.
7. Regulatory Authority
    Two commenters suggested that the special rule would exceed the
scope of the authority granted by Congress. They stated that the impact
of the rule is on the estates of decedents dying after the sunset of
the increased BEA period. They suggested that the rule would violate
the reconciliation rules under which the TCJA was passed because it
would increase the impact on the deficit beyond 2025, and therefore
could not have been what Congress intended in the grant of regulatory
authority. They also suggested that the avoidance of an estate tax that
recaptures gift tax on sheltered gifts could not have been what
Congress intended because they interpret the TCJA revenue estimates as
showing that the recapture of that gift tax was contemplated. In short,
these commenters suggested that Congress was concerned with the
treatment of transfers made before January 1, 2026, but not with those
made after December 31, 2025.
    As explained in the following paragraphs, these suggestions are
inconsistent with section 2001(g), which addresses the effect of
changes in tax rates and exclusion amounts on the computation of the
estate tax. Moreover, they are also inconsistent with the plain
language of section 2001(g)(2), which addresses circumstances that can
occur only after December 31, 2025.
    What is now section 2001(g)(1) of the Code was added by the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of
2010, Public Law 111-312, 124 Stat. 3296 (2010) (TRUIRJCA). Section
302(a) of TRUIRJCA raised the exclusion amount to $5 million, as
adjusted for inflation, and reduced the maximum tax rate from 45 to 35
percent. Section 302(d)(1)(B) of TRUIRJCA, ``Modifications of Estate
and Gift Taxes to Reflect Differences in Credit Resulting From
Different Tax Rates,'' added section 2001(g) to the Code. The effect of
section 2001(g) is to treat the post-1976 taxable gifts and the taxable
estate consistently by applying the same tax rate, regardless of
whether the transfer occurred during life or at death. This consistency
is achieved by using one tax rate to determine not only the gift and
estate tax liabilities, but also the credit against the estate tax and
against all prior gift taxes. This is the case regardless of whether
rates have increased or decreased.
    Section 2001(g)(2) of the Code was added by the TCJA. Section 11061
of the TCJA raised the BEA to $10 million, as adjusted for inflation,
for transfers after December 31, 2017, and before January 1, 2026. The
TCJA then provided that the BEA reverts to $5 million, as adjusted for
inflation, for transfers after December 31, 2025. The addition of
section 2001(g)(2) was a conforming amendment to the estate tax. H.
Conf. Rept. 115-466, 115th Cong., 1st sess. 316 (Dec. 15, 2017). Under
current law, the first change in the BEA to which section 2001(g)(2)
could be applicable is the decrease to $5 million, as adjusted for
inflation, on January 1, 2026.
    As explained in the preamble to the proposed regulations, a
decrease in the BEA has the potential to cause the imposition of estate
tax on gifts that were sheltered from gift tax by the higher BEA in
effect when the gifts were made. Again, under current law, this can
occur only after December 31, 2025, when the BEA reverts to $5 million,
as adjusted for inflation, as a result of the sunset of the increased
BEA.
    The impact of the sunset of the increased BEA as of January 1,
2026, was precisely the situation Congress wished to have addressed
when it made the explicit grant of regulatory authority under section
2001(g)(2) and, further, the purpose of that grant was to authorize a
regulatory rule to ensure that there will be no imposition of estate
tax on inter vivos gifts that were sheltered from gift tax by the
increased BEA in effect when the gifts were made. Indeed, prior
legislative efforts to address the effect of anticipated reductions in
the exclusion amount have proposed various approaches to produce the
same result. See the Sensible Estate Tax Act of 2011, H.R. 3467, 112th
Cong., 1st sess. section 2(c) (2011) (amending section 2001(g) to
address a proposed reduction in the exclusion amount from $5 million to
$1 million); and the Middle Class Tax Cut Act, S. 3393, 112th Cong.,
2nd sess. section 201(b) (2012) (adding section 2001(h) to address a
proposed reduction in the exclusion amount from $5 million to $3.5
million). As explained in ``General Explanation of Public Law 115-97''
(TCJA Bluebook),
    Because the increase in the basic exclusion amount does not
apply for estates of decedents dying after December 31, 2025, it is
expected that this guidance will prevent the estate tax computation
under section 2001(g) from recapturing, or ``clawing back,'' all or
a portion of the benefit of the increased basic exclusion amount
used to offset gift tax for certain decedents who make taxable gifts
between January 1, 2018, and December 31, 2025, and die after
December 31, 2025.
Joint Comm. on Taxation, JCS-1-18, ``General Explanation of Public Law
115-97,'' 89 (2018). One commenter disputes the TCJA Bluebook
explanation as an indication that the grant of
[[Page 64998]]
regulatory authority was to prevent this ``clawback'' on the basis of
the fact that the Bluebook was not published until almost one year
after the enactment of the TCJA. The Treasury Department and the IRS
consider the TCJA Bluebook's explanation of the grant of regulatory
authority to be an accurate reflection of Congressional intent.
    Finally, one commenter said that the special rule is based on the
``flawed assumption'' that such ``clawback'' would constitute double
taxation. The commenter said that the gift and estate taxes are two
different taxes, even though cumulative, and thus subjecting the same
inter vivos transfer to both taxes would not be double taxation. The
Treasury Department and the IRS disagree with this proposition. The
gift and estate taxes are subject to a unified structure that ensures
that a transfer is taxed only once, regardless of whether that transfer
ultimately is treated as an inter vivos transfer or as a testamentary
transfer. Indeed, the way in which the estate tax statute addresses
prior gifts included in the gross estate makes it clear that a single
transfer is to be taxed only once.
    In sum, section 2001(g) is directed to the consequences of changing
tax rates and decreasing exclusion amounts on the computation of the
estate tax. In the absence of section 2001(g)(1), a change in tax rates
could subject post-1976 taxable gifts and the taxable estate to
different rates, which could adversely impact the amount of credit
available against the estate tax. In the absence of the special rule
implementing the directions in section 2001(g)(2), a decrease in the
exclusion amount could have the effect of understating the gift tax
payable on post-1976 gifts, with the result that estate tax would be
imposed on gifts that were sheltered from tax when made by the
increased BEA. Under current law, a decrease in the exclusion amount
cannot occur until after December 31, 2025. This is the period to which
section 2001(g)(2) is directed. Accordingly, the special rule is well
within the scope of the regulatory authority and accurately reflects
the purpose of that authority.
8. Alternate Approach
    Another commenter, although supportive of the goal of the special
rule, objected to the special rule, saying that the rule would
eliminate the benefit of some post-2025 inflation adjustments. The
commenter proposed an alternative rule designed to preserve the
availability of those inflation adjustments. Each point will be
addressed in turn.
    As previously discussed, under the special rule, the post-2025
inflation adjustments provide no additional benefits to the decedent
until the post-2025 BEA, as adjusted for inflation, exceeds the amount
of the BEA previously allowable to shelter gifts from gift tax. The
commenter pointed out that, under current law, inflation adjustments to
the BEA that become effective after a gift was made are available
against the tax on subsequent gifts or the taxable estate, even if the
full amount of the BEA at the time of the prior gift was allowable
against the gift tax on that gift. The commenter questioned why this
should not continue to be the case after 2025. Although it is true that
subsequent inflation adjustments are available to the taxpayer in later
years, a reduction in the BEA creates a very different situation that
justifies a different result. In that case, which is the focus of the
special rule, the statute provides that, on January 1, 2026, the BEA is
reset at a reduced amount. While that amount will be subject to annual
inflation adjustments, the usual rules will continue to apply.
Specifically, exemption that shelters gifts during life is not
available on death. Thus, if the amount of BEA allowable during life
exceeds the date of death BEA, there is no remaining BEA available to
the decedent's estate, even though the BEA at death includes post-2025
inflation adjustments. Thus, the special rule does not eliminate the
benefit of the post-2025 inflation adjustments; however, neither does
it change the fact that the credit based on the BEA may be applied only
once.
    The commenter suggested an alternative rule under which the
computation of gift tax payable to be applied after 2025 instead would
be based on the BEA as if the BEA's temporary increase to $10 million
had never been enacted. By treating a portion of the increased BEA
period gifts as taxable, the commenter's proposal increases gift tax
payable to free up a credit based on the post-2025 inflation
adjustments for use against the estate tax. In support of this
approach, the commenter cites the language of the sunset provision of
the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),
Public Law 107-16, 115 Stat. 38, 150 (2001). Section 901(b) of EGGTRA
provides, in part, that the Code shall be applied after the expiration
of the increased exclusion amount as if the increased exclusion amount
``had never been enacted.''
    Finally, the commenter questioned the choice of the special rule as
being administrable, but acknowledged that the commenter's alternative
rule would require changes to the computation of the gift tax as well
as the estate tax.
    The commenter's alternative rule was not adopted for several
reasons. First, the plain language that Congress used in section
2001(g)(2)(B) directs that the BEA to be used in computing gift tax
payable is the historical one, the one ``applicable with respect to any
gifts made by the decedent.'' Congress did not use the ``had never been
enacted'' language in section 2001(g)(2). Second, the suggestion is
inconsistent with the treatment of the credit in the unified gift and
estate tax regime. The credit is applied first against the gift tax as
gifts are made, and then, to the extent any credit remains at death,
against the estate tax. To the extent that the credit that sheltered
the decedent's gifts from gift tax exceeds the credit available at
death, including any post-2025 inflation adjustments, the decedent
already has had the benefit of the credit available at death--
specifically, an amount equal to the post-2025 inflation adjustments
already has been allowed in computing the gift tax. The pre-2026 BEA
based credit and the post-2025 BEA based credit are not two separate
credits; rather, they are the same credit, whose maximum amount is
reduced after 2025. Once the cumulative value of taxable gifts has
exceeded a particular amount of credit, that amount of credit has been
used and is no longer available. Finally, as a policy matter and in
general terms, the statutory estate tax computation is designed to
impose a 40 percent tax on the taxable estate of a decedent who has
fully exhausted the available credit by gifts made during life. This is
true regardless of whether the gifts were sheltered from gift tax by
the increased BEA. That result is achieved by the approach of the
special rule in these final regulations, but would not be achieved by
the approach recommended by the commenter. By treating a portion of the
increased BEA period gifts as taxable despite the fact that they were
not subjected to tax, the commenter's proposal would overstate gift tax
payable. The result would be an understatement of the estate tax.
9. Applicability Date
    Sections 7805(b)(1)(A) and (B) of the Code generally provide that
no temporary, proposed, or final regulation relating to the internal
revenue laws may apply to any taxable period ending before the earliest
of (A) the date on which such regulation is filed with the Federal
Register; or (B) in the case of a final regulation, the date on which a
proposed or temporary regulation to which the final regulation relates
was
[[Page 64999]]
filed with the Federal Register. Section 7805(b)(7) provides that the
Secretary may provide for any taxpayer to elect to apply any regulation
before the dates specified in section 7805(b)(1).
    Consistent with section 7805(b)(1)(A), these final regulations
apply to estates of decedents dying on and after November 26, 2019.
Consistent with section 7805(b)(7), paragraph (e)(3) of these final
regulations may be applied by estates of decedents dying after December
31, 2017, and before November 26, 2019. In the interest of clarity, a
cross-reference has been added addressing the basic exclusion amount
applicable to estates of decedents dying after June 11, 2015, and
before January 1, 2018.
Special Analyses
    These final regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these final regulations will not have a
significant economic impact on a substantial number of small entities.
These final regulations will affect donors of gifts made after 2017 and
the estates of decedents dying after 2017, and implement an increase in
the amount that is excluded from gift and estate tax. Neither an
individual nor the estate of a deceased individual is a small entity
within the meaning of 5 U.S.C. 601(6). Accordingly, a regulatory
flexibility analysis is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding these final regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business, and no
comments were received.
Drafting Information
    The principal author of these final regulations is Deborah S. Ryan,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries). Other personnel from the Treasury Department and the IRS
participated in their development.
Statement of Availability of IRS Documents
    Notice 2017-15 is published in the Internal Revenue Bulletin and is
available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at http://www.irs.gov.
List of Subjects in 26 CFR Part 20
    Estate taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
    Accordingly, 26 CFR part 20 is amended as follows:
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
0
Par. 1. The authority citation for part 20 is amended by revising the
entry for Sec.  20.2010-1 to read in part as follows:
    Authority: 26 U.S.C. 7805.
* * * * *
    Section 20.2010-1 also issued under 26 U.S.C. 2001(g)(2) and 26
U.S.C. 2010(c)(6).
* * * * *
0
Par. 2. Section 20.2010-0 is amended by redesignating the entries for
Sec.  20.2010-1(c) through (e) as entries (d) through (f),
respectively, and adding a new entry for Sec.  20.2010-1(c) to read as
follows:
Sec.  20.2010-0  Table of contents.
* * * * *
Sec.  20.2010-1  Unified credit against estate tax; in general.
* * * * *
    (c) Special rule in the case of a difference between the basic
exclusion amount applicable to gifts and that applicable at the donor's
date of death.
* * * * *
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Par. 3. Section 20.2010-1 is amended by:
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1. In the final sentence of paragraph (a), removing ``paragraph
(d)(1)'' and adding ``paragraph (e)(1)'' in its place;
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2. Redesignating paragraphs (c) through (e) as paragraphs (d) through
(f), respectively;
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3. Adding a new paragraph (c); and
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4. Revising newly redesignated paragraphs (e)(3) and (f).
    The addition and revisions read as follows:
Sec.  20.2010-1  Unified credit against estate tax; in general.
* * * * *
    (c) Special rule in the case of a difference between the basic
exclusion amount applicable to gifts and that applicable at the donor's
date of death. Changes in the basic exclusion amount that occur between
the date of a donor's gift and the date of the donor's death may cause
the basic exclusion amount allowable on the date of a gift to exceed
that allowable on the date of death. If the total of the amounts
allowable as a credit in computing the gift tax payable on the
decedent's post-1976 gifts, within the meaning of section 2001(b)(2),
to the extent such credits are based solely on the basic exclusion
amount as defined and adjusted in section 2010(c)(3), exceeds the
credit allowable within the meaning of section 2010(a) in computing the
estate tax, again only to the extent such credit is based solely on
such basic exclusion amount, in each case by applying the tax rates in
effect at the decedent's death, then the portion of the credit
allowable in computing the estate tax on the decedent's taxable estate
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 post-1976
gifts.
    (1) Computational rules. For purposes of this paragraph (c):
    (i) In determining the amounts allowable as a credit:
    (A) The amount allowable as a credit in computing gift tax payable
for any calendar period may not exceed the tentative tax on the gifts
made during that period (section 2505(c)); and
    (B) The amount allowable as a credit in computing the estate tax
may not exceed the net tentative tax on the taxable estate (section
2010(d)).
    (ii) In determining the extent to which an amount allowable as a
credit in computing gift tax payable is based solely on the basic
exclusion amount:
    (A) Any deceased spousal unused exclusion (DSUE) amount available
to the decedent is deemed to be applied to gifts made by the decedent
before the decedent's basic exclusion amount is applied to those gifts
(see Sec. Sec.  20.2010-3(b) and 25.2505-2(b));
    (B) In a calendar period in which the applicable exclusion amount
allowable with regard to gifts made during that period includes amounts
other than the basic exclusion amount, the allowable basic exclusion
amount may not exceed that necessary to reduce the tentative gift tax
to zero; and
    (C) In a calendar period in which the applicable exclusion amount
allowable with regard to gifts made during that period includes amounts
other than the basic exclusion amount, the portion of the credit based
solely on the basic exclusion amount is that which corresponds to the
result of dividing the basic exclusion amount allocable to those gifts
by the applicable exclusion amount allocable to those gifts.
    (iii) In determining the extent to which an amount allowable as a
credit in computing the estate tax is based solely on the basic
exclusion amount, the credit is computed as if the
[[Page 65000]]
applicable exclusion amount were limited to the basic exclusion amount.
    (2) Examples. All basic exclusion amounts include hypothetical
inflation adjustments. Unless otherwise stated, in each example the
decedent's date of death is after 2025.
    (i) Example 1. Individual A (never married) made cumulative
post-1976 taxable gifts of $9 million, all of which were sheltered
from gift tax by the cumulative total of $11.4 million in basic
exclusion amount allowable on the dates of the gifts. The basic
exclusion amount on A's date of death is $6.8 million. A was not
eligible for any restored exclusion amount pursuant to Notice 2017-
15. Because the total of the amounts allowable as a credit in
computing the gift tax payable on A's post-1976 gifts (based on the
$9 million of basic exclusion amount used to determine those
credits) exceeds the credit based on the $6.8 million basic
exclusion amount allowable on A's date of death, this paragraph (c)
applies, and the credit for purposes of computing A's estate tax is
based on a basic exclusion amount of $9 million, the amount used to
determine the credits allowable in computing the gift tax payable on
A's post-1976 gifts.
    (ii) Example 2. Assume that the facts are the same as in Example
1 of paragraph (c)(2)(i) of this section except that A made
cumulative post-1976 taxable gifts of $4 million. Because the total
of the amounts allowable as a credit in computing the gift tax
payable on A's post-1976 gifts is less than the credit based on the
$6.8 million basic exclusion amount allowable on A's date of death,
this paragraph (c) does not apply. The credit to be applied for
purposes of computing A's estate tax is based on the $6.8 million
basic exclusion amount as of A's date of death, subject to the
limitation of section 2010(d).
    (iii) Example 3. Individual B's predeceased spouse, C, died
before 2026, at a time when the basic exclusion amount was $11.4
million. C had made no taxable gifts and had no taxable estate. C's
executor elected, pursuant to Sec.  20.2010-2, to allow B to take
into account C's $11.4 million DSUE amount. B made no taxable gifts
and did not remarry. The basic exclusion amount on B's date of death
is $6.8 million. Because the total of the amounts allowable as a
credit in computing the gift tax payable on B's post-1976 gifts
attributable to the basic exclusion amount (zero) is less than the
credit based on the basic exclusion amount allowable on B's date of
death, this paragraph (c) does not apply. The credit to be applied
for purposes of computing B's estate tax is based on B's $18.2
million applicable exclusion amount, consisting of the $6.8 million
basic exclusion amount on B's date of death plus the $11.4 million
DSUE amount, subject to the limitation of section 2010(d).
    (iv) Example 4. Assume the facts are the same as in Example 3 of
paragraph (c)(2)(iii) of this section except that, after C's death
and before 2026, B makes taxable gifts of $14 million in a year when
the basic exclusion amount is $12 million. B is considered to apply
the DSUE amount to the gifts before applying B's basic exclusion
amount. The amount allowable as a credit in computing the gift tax
payable on B's post-1976 gifts for that year ($5,545,800) is the tax
on $14 million, consisting of $11.4 million in DSUE amount and $2.6
million in basic exclusion amount. This basic exclusion amount is
18.6 percent of the $14 million exclusion amount allocable to those
gifts, with the result that $1,031,519 (0.186 x $5,545,800) of the
amount allowable as a credit for that year in computing gift tax
payable is based solely on the basic exclusion amount. The amount
allowable as a credit based solely on the basic exclusion amount for
purposes of computing B's estate tax ($2,665,800) is the tax on the
$6.8 million basic exclusion amount on B's date of death. Because
the portion of the credit allowable in computing the gift tax
payable on B's post-1976 gifts based solely on the basic exclusion
amount ($1,031,519) is less than the credit based solely on the
basic exclusion amount ($2,665,800) allowable on B's date of death,
this paragraph (c) does not apply. The credit to be applied for
purposes of computing B's estate tax is based on B's $18.2 million
applicable exclusion amount, consisting of the $6.8 million basic
exclusion amount on B's date of death plus the $11.4 million DSUE
amount, subject to the limitation of section 2010(d).
    (3) [Reserved]
* * * * *
    (e) * * *
    (3) Basic exclusion amount. Except to the extent provided in
paragraph (e)(3)(iii) of this section, the basic exclusion amount is
the sum of the amounts described in paragraphs (e)(3)(i) and (ii) of
this section.
    (i) For any decedent dying in calendar year 2011 or thereafter,
$5,000,000; and
    (ii) For any decedent dying after calendar year 2011 and before
calendar year 2018, $5,000,000 multiplied by the cost-of-living
adjustment determined under section 1(f)(3) for the calendar year of
the decedent's death by substituting ``calendar year 2010'' for
``calendar year 1992'' in section 1(f)(3)(B) and by rounding to the
nearest multiple of $10,000. For any decedent dying after calendar year
2017, $5,000,000 multiplied by the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year of the decedent's death by
substituting ``calendar year 2010'' for ``calendar year 2016'' in
section 1(f)(3)(A)(ii) and rounded to the nearest multiple of $10,000.
    (iii) For any decedent dying after calendar year 2017, and before
calendar year 2026, paragraphs (e)(3)(i) and (ii) of this section will
be applied by substituting ``$10,000,000'' for ``$5,000,000.''
* * * * *
    (f) Applicability dates--(1) In general. Except as provided in
paragraph (f)(2) of this section, this section applies to the estates
of decedents dying after June 11, 2015. For the rules applicable to
estates of decedents dying after December 31, 2010, and before June 12,
2015, see Sec.  20.2010-1T, as contained in 26 CFR part 20, revised as
of April 1, 2015.
    (2) Exceptions. Paragraphs (c) and (e)(3) of this section apply to
estates of decedents dying on and after November 26, 2019. However,
paragraph (e)(3) of this section may be applied by estates of decedents
dying after December 31, 2017, and before November 26, 2019. For the
explanation of the basic exclusion amount applicable to estates of
decedents dying after June 11, 2015, and before January 1, 2018, see
Sec.  20.2010-1(d)(3), as contained in 26 CFR part 20, revised as of
April 1, 2019.
Sec.  20.2010-3  [Amended]
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Par. 4. Section 20.2010-3 is amended by removing ``Sec.  20.2010-
1(d)(5)'' wherever it appears and adding in its place ``Sec.  20.2010-
1(e)(5)''.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: November 12, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-25601 Filed 11-22-19; 4:15 pm]
BILLING CODE 4830-01-P