Beware of Clawback

According to the Tax Code as it reads now, the applicable exclusion amount for a donor who dies in 2013 or later reverts back to $1 million from the current $5 million exclusion amount. The donor’s lifetime gifts of over $1 million are “clawed back,” lose the current $5 million applicable exclusion amount, and incur estate tax.

Post-gift appreciation is removed from the estate from the time of the gift to the time of the donor’s death. Lifetime gifts to grantor trusts, gifts that are a fractional interest in property, and gifts to grantor retained trusts can all help reduce estate taxes even if they are subject to clawback.

Taxpayers should be wary of the fact that clawbacks can skew estate tax apportionment. Taxpayers may consider entering into an agreement with gift beneficiaries whereby the beneficiaries agree to pay an appropriate share of the estate tax to the estate in the event of clawback. This type of agreement can also lower the taxable value of the gift by the actuarial present value of the increase in estate tax that results from clawback. Without this type of agreement, the estate could go bankrupt as a result of the clawback.

For more on clawback, see Michael J. Jones, Who’s Afraid of (Gasp!) CLAWBACK?, Trusts & Estates, Jan. 18, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.