Estate and Gift Taxes; Difference in the Basic Exclusion Amount, 64995-65000 [2019-25601]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[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 https://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.
* * * * *

0
Par. 3. Section 20.2010-1 is amended by:
0
1. In the final sentence of paragraph (a), removing ``paragraph 
(d)(1)'' and adding ``paragraph (e)(1)'' in its place;
0
2. Redesignating paragraphs (c) through (e) as paragraphs (d) through 
(f), respectively;
0
3. Adding a new paragraph (c); and
0
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]

0
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