What is the anti-clawback rule for estate and gift tax?

The anti-clawback rule in Treasury Regulation § 20.2010-1(c) ensures that gifts made using the current high exemption amount will not be subject to additional estate tax if the exemption decreases after the 2025 sunset. This gives taxpayers confidence that large gifts made now will not be penalized when the exemption drops.

What is a Spousal Lifetime Access Trust (SLAT) for estate tax planning?

A SLAT is an irrevocable trust created by one spouse for the benefit of the other, allowing the donor spouse to use the gift tax exemption while the beneficiary spouse retains access to the trust assets. SLATs are among the most popular vehicles for locking in the current high exemption before the 2025 sunset.

Estate Tax Planning Window: Two Years Left Before the Exemption Drops | Lynch Law

The federal estate and gift tax exemption stands at $13,610,000 per person for 2024 — $27,220,000 for a married couple. This is the highest the exemption has ever been, and it is scheduled to be cut roughly in half after December 31, 2025. Unless Congress acts to extend the current exemption level, the basic exclusion amount will revert to its pre-Tax Cuts and Jobs Act level, adjusted for inflation — estimated at approximately $7 million per person.^[1]

For individuals and families with estates that will exceed the post-sunset exemption, the next two years represent a critical — and closing — planning window. This post examines the strategies available to take advantage of the current exemption before it drops.

The Anti-Clawback Rule

The most important piece of guidance on the sunset is the Treasury Department's anti-clawback regulation, finalized in 2019. The regulation confirms that if a taxpayer makes gifts during the period of the elevated exemption and the exemption later decreases, the IRS will not attempt to recapture the benefit of the higher exemption at death. In other words, gifts made using the $13.61 million exemption will not trigger additional estate tax even if the exemption drops to $7 million when the taxpayer dies.^[2]

This anti-clawback protection is the foundation of the current planning urgency. Without it, taxpayers would face the risk that gifts made under the elevated exemption could be effectively reversed by estate tax at death. The Treasury's confirmation that the higher exemption will be honored eliminates that risk and makes the case for using the exemption now compelling.

Spousal Lifetime Access Trusts (SLATs)

One of the most popular planning techniques for married couples is the Spousal Lifetime Access Trust, or SLAT. Each spouse creates an irrevocable trust for the benefit of the other spouse (and typically children and grandchildren), funding it with assets up to the unused exemption amount. The trusts are structured so that each spouse retains indirect access to the other's trust through the other spouse's role as a beneficiary.

SLATs allow a married couple to move up to $27.22 million out of their combined estates — sheltering all future appreciation from estate tax — while retaining some measure of indirect access to the transferred assets. However, SLATs carry important risks and limitations. The reciprocal trust doctrine may apply if the two trusts are too similar, collapsing them back into the grantors' estates. The indirect access disappears if the couple divorces or the beneficiary spouse dies. And the trusts must be genuinely irrevocable — the grantor cannot retain control or access without jeopardizing the estate tax exclusion.^[3]

Completed Gift Strategies

For individuals who do not need indirect access to the transferred assets, outright gifts or transfers to irrevocable trusts for children or grandchildren are simpler alternatives. The key requirement is that the gift be a completed transfer — the donor must relinquish dominion and control over the assets. Transfers to irrevocable trusts, transfers with retained interests (such as GRATs), and direct gifts all qualify if properly structured.

Gifts of closely held business interests are particularly attractive because they may qualify for valuation discounts. A minority interest in a family LLC or limited partnership, for example, may be valued at a discount of 20-35% below the proportionate share of the entity's net asset value, reflecting the lack of marketability and lack of control. These discounts effectively increase the amount of value that can be transferred within the exemption.^[4]

For very large estates, a combination of exemption-amount gifts and leveraged transactions — such as sales to intentionally defective grantor trusts (IDGTs) — can move substantially more than $13.61 million out of the estate. In a sale to an IDGT, the donor sells assets to a trust in exchange for a promissory note bearing interest at the applicable federal rate. Because the trust is a grantor trust for income tax purposes, the sale is disregarded for income tax — but for estate tax purposes, the assets (and their future appreciation) are outside the estate.

Generation-Skipping Transfer Planning

The generation-skipping transfer (GST) tax exemption is also set at $13,610,000 for 2024 and will decline along with the estate tax exemption after 2025. Taxpayers who are making large gifts should consider allocating their GST exemption to those gifts to create dynasty trusts that are exempt from estate tax at every generational level. A GST-exempt trust can grow and pass wealth to grandchildren, great-grandchildren, and beyond without incurring transfer tax at any level.^[5]

Mississippi's adoption of the Uniform Trust Code and its relatively long trust duration periods (Mississippi allows trusts to last for up to 360 years) make the state an attractive situs for dynasty trust planning.

The Clock Is Ticking

Estate tax planning of this magnitude cannot be accomplished overnight. Implementing a SLAT or IDGT requires careful drafting, valuation of transferred assets (particularly for closely held businesses or real estate), coordination with existing estate plans, and in many cases, restructuring of asset ownership. Appraisals take time to prepare, and the IRS is more likely to challenge transfers made in a rush at the end of the window.

Taxpayers with estates that may exceed the post-sunset exemption should begin the planning conversation with their estate planning advisors now. The combination of historically high exemptions, the anti-clawback protection, and the two-year window before sunset creates a planning opportunity that is unlikely to be replicated and cannot be captured retroactively.

References

^[1] IRC § 2010(c)(3); TCJA § 11061. The elevated exemption applies to estates of decedents dying and gifts made between January 1, 2018, and December 31, 2025. Rev. Proc. 2023-34 sets the 2024 amount at $13,610,000.
^[2] Treas. Reg. § 20.2010-1(c) (the "anti-clawback" regulation, finalized by T.D. 9884 on November 26, 2019). The regulation provides a special rule ensuring that estates will not be disadvantaged by the reduction in exemption.
^[3] See United States v. Estate of Grace, 395 U.S. 316 (1969) (establishing the reciprocal trust doctrine). Careful planning is required to differentiate the trusts sufficiently to avoid application of this doctrine.
^[4] See our prior discussion of closely held business valuation. Valuation discounts must be supported by qualified appraisals and are subject to IRS challenge.
^[5] IRC § 2631(a). The GST exemption is a separate allocation from the estate and gift tax exemption. Taxpayers should affirmatively allocate GST exemption on Form 709 to ensure the trusts are covered.