Retroactivity of Gift and Estate Tax Law Changes

The Biden administration has proposed sweeping changes in gift and estate tax rules. Currently, you may gift $15,000 per person per year to as many persons as you wish. Biden proposes gifts of $10,000 per person per year limited to two persons. On top of the unlimited number of $15,000 gifts you can make now, there is also a combined gift tax exemption of 11.7 million per person. You may use any of the 11.7 million exemption as a gift during your lifetime and use whatever is left of the exemption at death. Biden proposes to limit the gift and estate tax exemption to 3.5 million and to allow no more than 1 million of that amount to be used for lifetime gifts. Clearly, the time to act is now but the question is whether these proposed new rules would be applied retroactively. The answer: not likely.

Years ago, the US Supreme Court allowed President Clinton’s retroactive estate tax rate increase from 50% to 55% but noted in its opinion that the taxpayer did not take any action in reliance of the 50% rate (i.e. no one died in reliance on the tax 50% rate in the Code!). Once a bill is voted on by Congress, however, should it contain retroactive provisions, the taxpayer would not be able to claim they were unaware of the retroactive application of the law. Had the taxpayer actually acted in reliance on the law at that time, the decision may have very well been different. In general, there is a principle against retroactive application of the law as well as it being constitutionally dubious.

Taking affirmative action by making gifts in 2021, under Trump era rules, should make one reasonably safe from any retroactive application of the law. The sooner you act, the more likely you are to be “grandfathered”. Nevertheless, one cannot be too careful. It may be a good idea when making these gifts to irrevocable trusts to provide that the trustee may disclaim (i.e. refuse) these gifts on behalf of all the trust beneficiaries, up to nine months from the date of the gift, thereby allowing the gift to be reversed, if need be.

The latest word on these gift and estate tax law changes is that they will not take place until 2022. However, acting sooner rather than later still keeps growth of any assets outside of your estate.