Future of the Federal Estate Tax
DEAR TRUST OFFICER:
What’s going to happen to the federal estate tax? I heard it might be repealed this year?—OPTIMISTIC AND WEALTHY
DEAR OPTIMISTIC:
The amount exempt from federal estate tax for deaths occurring this year is $13.99 million per person. The exemption could go one of three ways.
First, if Congress takes no action the amount exempt will fall to about $7 million per person next year. This is because when the exemption was increased in 2017 it came with an expiration date, to meet Congressional budget rules.
Second, as you may have heard, there is considerable support among Republicans and many Democrats for repealing the federal estate tax entirely. A bill to this effect was introduced by Senate Majority Leader John Thune earlier this year. The federal gift tax would be retained, so as to limit intra-family transfers to lower income tax burdens. The amount of federal estate tax revenue collected is so small that some feel it is not worth the expense of compliance and enforcement. According to the IRS statistics, in 2022 (most recent data available) there were only 3,170 taxable estate tax returns.
Finally, the “One Big Beautiful Bill” that passed the House in May and is now before the Senate would increase the estate tax exemption permanently to $15 million and keep inflation adjustments for future years. This change seems more likely than complete repeal.
Many estate planners welcome the prospect of a permanent increase in the exemption, because it would create greater certainty for estate planning strategies. Complete repeal, on the other hand, could have surprising negative effects on existing estate plans, which a simple exemption increase would not.
For example, a two-trust estate plan for a married couple might fund a bypass trust with the formula “the amount exempt from federal tax,” leaving the balance of the estate to a marital deduction trust. Such a plan would incur no federal estate tax at the first death of a spouse, while maximizing the amount that passes tax-free at the surviving spouse’s death. What happens under that formula if the federal estate tax is repealed? Potentially, everything would go to the bypass trust, and nothing would pass to the marital deduction trust! Probably not what the testator had in mind.
We should have greater clarity about the future of the federal estate tax later this summer.
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