Will gifts made under new tax laws be ‘clawed back’ in 2026?

The Tax Cuts and Jobs Act made sweeping changes to America’s tax landscape. While certain changes affect those of any wealth, other changes will have a significant effect on those with large estates. People in Minnesota who have a large estate will want to pay particular attention to the new gift and estate taxexemption.

The new tax laws raised the amount of the gift and estate tax exemption to just over $11 million in 2018. This is approximately twice the amount that the exemption was previously. What this comes down to is that a person can make up to $11.18 million in gifts throughout their lifetime or as bequests in an estate plan once they die without the gifts being subjected to the 40 percent estate tax.

However, all good things must come to an end, and the gift and estate tax exemption will return to approximately $5 million per individual after 2025. That being said, there is no need to be concerned that any gifts made after 2025 in excess of $5 million will be “clawed back” and made part of their taxable estate. Under a newly proposed rule by the Internal Revenue Service and the United States Treasury, those who make gifts under the $11.8 million exclusion will not have those funds return to their taxable estate in 2026.

It is important to note that the proposed rule is still going through the approval and adoption process. Nevertheless, those with large estates may still benefit from gift-giving before the end of 2025. Doing so will reduce the amount of their taxable estate after they pass away. Moreover, some people find joy in watching their loved ones use a gift while the giver is alive, instead of leaving everything in a will or trust that will only become effective once the giver passes away. Keep in mind that tax laws are complicated and are subject to change. Therefore, readers should not base any estate planning decisions on the content in this post but should instead seek legal advice before making any decisions that could affect their taxable estate.