Student Question:

Question:  What would happen if a person used the maximum lifetime gift exclusion of $5,120,000 in the year 2012. But the person dies in the year 2015 assuming the limit dropped to a lower amount like 1 or 2 million? The lifetime amount gifted would be higher than the current limit.

Instructor Response:

Answer:  A great question.  We have never had a situation where the Exclusion Amount went down, instead of moving up. Therefore, if the Applicable Exclusion Amount declines to $1,000,000 in 2013, there is some uncertainty regarding the future tax treatment of prior-year lifetime gifts that exceeded $1,000,000. The uncertainty stems from the fact that all post-1976 lifetime taxable gifts are added back to the estate at death. For example, if at death the Applicable Exclusion Amount is only $1,000,000, then what are the tax implications of adding back a lifetime gift of $2,000,000 that was made in 2012? The gift was not subject to taxation in 2012 when the Applicable Exclusion Amount was $5,120,000, but will it result in increased taxation if it gets added back to the estate in a year when the Applicable Exclusion Amount has fallen to $1,000,000? The answer awaits future legislation or direction by the IRS.