Over the past 20 years, less than 1% of estates have actually paid an estate tax.(1) Yet the federal estate tax has been an important source of federal revenue for more than a century. In 2023, the Tax Policy Center indicates that approximately 4,000 estates paid federal estate tax totaling more than $24,000,000,000.
Since 2002, the estate tax exemption equivalent (the value of assets an individual can give away before being subject to estate tax) has increased from $1MM to the current exemption equivalent of $13.99MM. This comparatively robust federal estate tax exemption equivalent is slated to “sunset” and revert back to pre 2018 status on 12/31/25. The sunset would result in a projected estate exemption equivalent to roughly half of the current amount, or roughly $7MM at the end of 2025. For couples with a net worth of $14MM or more or individuals with a net worth greater than $7MM, a sunset would mean their estates could be significantly impacted by federal estate taxes. Shortly after the national elections in November 2024, there has been speculation that Congress is likely to override the sunset and allow the larger estate tax exemption to remain in place for the foreseeable future.
However, in early February 2025, legislation was introduced in both chambers of Congress to repeal the federal estate taxes completely and modify current gift tax legislation. U.S. Rep. Randy Feenstra (R-Iowa) introduced the House bill (H.R. 1301), which has 175 original bipartisan co-sponsors, and U.S. Sen. John Thune (R-S.D.) introduced the Senate companion bill (S. 587), supported by 45 original Republican co-sponsors. Both bills seek to permanently repeal the federal estate tax and GST tax, reduce the top gift tax rate from 40% to 35%, retain the lifetime exemption amount (currently $13.99 million per taxpayer), retain the step-up in basis for inherited assets and other provisions relating to certain types of trusts. A notable difference in the two bills is that the Senate bill would treat transfers of incomplete gifts to non-grantor trusts, as taxable gifts—a significant difference from the House bill.
While the House, with its slim Republican majority, could pass H.R. 1301 by a party-line vote, the Senate faces a higher threshold as it would likely require the GOP to use budget reconciliation to bypass the 60-vote filibuster threshold. Reconciliation is further complicated by the Byrd Rule, which prohibits non-budgetary provisions and mandates deficit neutrality beyond the 10-year budget window.
With tax cuts being proposed in other areas, deficit neutrality beyond 10 years might be an insurmountable task, and many lawmakers may prefer extending the Tax Cuts and Jobs Act’s doubled exemption rather than pursuing complete repeal.
With the uncertainty around estate taxes and where they may be heading, here are some planning topics that families and individuals should be considering:
- Using the exemption equivalent of the first spouse to die. The current estate tax framework allows for the transfer of a deceased spouse’s unused estate tax exemption to the surviving spouse, effectively doubling their estate tax exemption through portability. If the federal estate tax is repealed, this strategy becomes obsolete. However, if the estate tax were to be re-enacted, the implications for estates that exceed the exemption amount could be significant. To mitigate this risk, couples should consider funding a bypass or credit shelter trust at the first spouse’s death, even if no federal estate tax applies at that time. This proactive measure could safeguard the surviving spouse’s estate from future tax liabilities if the estate tax is reinstated.
- Funding of trusts under existing plans. Formula clauses in trust agreements that reference current federal estate tax statutes and exemption amounts may need to be revised to remain effective and relevant in the event of a tax repeal. Additionally, there are more than a dozen states that impose a state estate tax, which may still apply even if the federal estate tax is repealed. Review trust agreements to ensure they accommodate both federal and state legislative changes to minimize the exposure on the federal and state level.
- Income tax planning. Structuring estate plans to minimize income taxes for heirs should always be a consideration, however, with the potential repeal of the estate tax, income tax planning may become increasingly important.
If the federal estate tax were to be repealed, the landscape of estate planning that has existed since the enactment of the federal estate tax in 2016 will be impacted significantly, and a new paradigm of planning will evolve. However, reviewing and updating your estate plan with your professional advisors on a regular basis is highly recommended whether or not the estate tax remains or is repealed.
Advisory Services offered through Nepsis, Inc., An SEC Registered Investment Advisor.
Source:
- Institute on Tax and Economic Policy, citing IRS, Statistics of Income Division Table 17, taxable estate returns as a percentage of adult deaths selected years 1934-2019