Section 2010(c)(3)(C) Exclusion amount increases for estate tax

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The IRS has cleared away uncertainty for wealthy taxpayers and their financial advisors when it comes to estate and gift taxes. 

For example, if a decedent had made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by a BEA of $10 million applicable on the dates of the gifts, and if the decedent died after 2025 when the BEA was $5 million, the credit to be applied in computing the estate tax is that based upon the $9 million of BEA that was used to compute gift tax payable.

In computing the amount of Federal gift tax or the amount of Federal estate tax, the gift and estate tax provisions of the Internal Revenue Code (“Code”)1 apply a unified rate schedule to the taxpayer’s-cumulative taxable gifts and taxable estate on death to arrive at a net tentative tax. The net tentative tax then is reduced by a credit based on the applicable exclusion amount (AEA)  which is the sum of the BEA within the meaning of section 2010(c)(3) and, if applicable, the DSUE amount within the meaning of section 2010(c)(4). In certain cases, the AEA also includes a restored exclusion amount pursuant to Notice 2017-15, 2017-6 I.R.B. 783. Prior to January 1, 2018, for estates of decedents dying and gifts made beginning in 2011, section 2010(c)(3) provided a BEA of $5 million, indexed for inflation after 2011. The credit is applied first against the gift tax, on a cumulative basis, as taxable gifts are made. To the extent that any credit remains at death, it is applied against the estate tax.

Final regulations from the agency make clear taxpayers can benefit from the temporarily increased estate and gift tax exemption even if they die after the increase expires in 2026. 
The rules, announced Friday, implement changes required by the 2017 tax overhaul. 
The law doubled the estate and gift tax basic exclusion amount (BEA) – from $5 million to $10 million, adjusted for inflation -- for tax years 2018 through 2025. This year the exclusion is $11.4 million. In 2026, it will revert to the 2017 level of $5 million, as adjusted for inflation. 
The BEA is used to determine the amount of assets taxpayers can gift during their lifetimes tax free. Any unused amount can be used as a credit to reduce or eliminate estate taxes when they die. 
Concerns had arisen about taxpayers who take advantage of the temporarily increased exclusion by making large gifts but then die after the BEA returns to lower levels. Would taxes on their estates be calculated using the lower BEA? 
But the IRS says “the final regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.”

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