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n response to a perceived potential abuse of the ‘anti-clawback’ regulations released in 2019, on 27 April the IRS published Proposed Regulation sec. 20.2010-1(c)(3). 

Federal tax reform enacted in 2017 increased the basic exclusion amount (gift and estate tax exemption) from $5 million to $10 million (adjusted for inflation) for gifts made and decedents dying after December 31, 2017 and before January 1, 2026. The basic exclusion amount is scheduled to revert to $5 million (adjusted for inflation) on 1 January 2026.

On 26 November 2019, the IRS published Final Regulation sec. 20.2010-1(c) (known colloquially as the ‘anti-clawback’ regulations), which addressed instances where the credit related to the basic exclusion amount applicable at the time of death for estate tax purposes is less than the credit allowable in computing the gift tax payable with respect to the gifts that the decedent made during their lifetime. The intention of the regulations was to avoid imposing an additional estate tax in situations where the exemption at death was lower than the exemption at the time of the completed gift.

The recently proposed regulation would impose some limits on the anti-clawback regulations issued in 2019. The regulation, when finalized, is proposed to apply to estates of decedents dying on or after 27 April 2022. Comments on the proposed regulations are due by 26 July 2022.

The IRS states that the goal of the proposed regulation is to ensure that bona fide inter vivos transfers are treated as gifts for both gift and estate tax purposes, and therefore, by contrast, they are subject to the values, gift tax rates, and exclusions applicable as of the date of the gift, by contrast, a gift of property that remains includible in the donor’s estate would be subject to the values, estate tax rates, and exclusions applicable at the date of death.