How does the basic exclusion amount apply in 2026 if I make large gifts before 2026

If you make large gifts before 2026, the basic exclusion amount (BEA) applicable at the time of the gift will be used to determine the gift tax exclusion, and you will not be adversely impacted by the scheduled reduction of the BEA in 2026. Specifically, the IRS has issued regulations to prevent a "clawback" of the higher exclusion amount used for gifts made between 2018 and 2025 when the exclusion amount is scheduled to revert to pre-2018 levels in 2026.

Here is a detailed explanation:

1. Current BEA and Future Reduction: The Tax Cuts and Jobs Act (TCJA) temporarily increased the BEA from $5 million to $10 million (adjusted for inflation) for tax years 2018 through 2025. This means that for gifts made during this period, the higher exclusion amount applies.
2. Anti-Clawback Regulations: The IRS issued final regulations on November 19, 2019, to address concerns about the potential clawback of the higher exclusion amount. These regulations ensure that the estate tax credit is calculated using the higher of the BEA applicable at the time of the gifts or the BEA at the time of death.
3. Example: If you make a taxable gift of $10 million in 2018 when the BEA is $11.18 million, you can use the $10 million of the BEA to reduce the gift tax to zero. If you die in 2026 when the BEA reverts to a lower amount, your estate can still use the $10 million BEA that was applicable at the time of the gift to calculate the estate tax credit.
4. Unified Credit: The unified credit against estate and gift taxes ensures that the exclusion amount used for lifetime gifts reduces the amount available at death. However, the anti-clawback regulations ensure that the higher exclusion amount used for gifts made between 2018 and 2025 is preserved for estate tax purposes, even if the BEA is lower at the time of death.

In summary, if you make large gifts before 2026, the higher BEA applicable at the time of the gift will be preserved for calculating the estate tax credit, preventing any adverse impact from the scheduled reduction of the BEA in 2026.

Sources:
Publication 559 (2023)
§ 2010. Unified credit against estate tax
§ 20.2010-1. Unified credit against estate tax; in general.
Intergenerational Wealth Transfer Taxes See Substantial Changes
IRM Part 21. Customer Account Services. Chapter 7. Business Tax Returns and Non-Master File Accounts. Section 5. Estate and Gift Tax Returns