With an election year on the horizon, the federal estate tax is about to make it’s quadrennial jump from total obscurity into the national spotlight.
The timing this time around is interesting, as according to a recent study by Institute on Tax an Economic Policy (a non-profit, non-partisan group that analyzes the impacts of federal, state and local tax policies), the estate tax currently is the weakest it’s ever been.
Let’s get one thing out of the way before we launch into looking at the results of the study. One of the main rallying cries of those looking to politicize the federal estate tax (a good heuristic for figuring out whether someone is speaking honestly about the estate tax: If they use the term "death tax," you probably should take their opinion with a grain of salt) is that it’s "double taxation." It isn’t. It’s a tax on the transfer of goods, same as the gift tax. In fact, a large portion of the assets that end up subject to the tax are unrealized capital gains, which would go completely untaxed if it were not for the existence of the estate tax.
The Trump-era tax cuts largely gutted the federal estate tax by massively increasing the individual estate and gift tax exemption to roughly $13 million for 2024. With the pre-existing rules for portability allowing a living spouse to inherit a deceased one’s unused exemption, that gives every married couple in America a roughly $26 million total cushion before their estate would be subject to federal taxation. Now, this isn’t just a partisan issue, and can’t be laid entirely at the feet of President Donald Trump. Over the last two decades both parties have participated in driving the exemption up to its current ridiculous high (it was $645,000 as recently as 2001). And, as a result the total share of adults leaving behind taxable estates, which used to stand at over 2%, has plummeted. According to the most recent data, in 2019, only 8 out of every 10,000 people left an estate large enough to trigger the federal tax. To put a more relatable number on that statistic, most of the money paid by estates under the current tax comes from those worth over $50 million. Not exactly an issue for the everyman.
Neither side looks too likely to change things all that drastically either. There are, of course, the much-anticipated sunset of the aforementioned Trump era tax cuts in 2026. But even if those go through untouched, the exemption will still sit at a healthy ~$7 million (after being indexed for inflation) per individual and $14 million per couple. According to the study, the number of Americans subject to the estate tax would still be less than 1% under any proposal currently in front of congress.
And that’s without even getting into the magic that good advisors and estate planners can work, both by design and by leveraging various loopholes, to selectively move assets into and out of an estate to minimize total taxes while still maximizing the free basis step up that assets get at death, often turning a negative into a positive.
So, this election cycle, when the federal estate tax inevitably comes up, make your individual decision on whether you think it should be strengthened, weakened, repealed or even talked about by serious candidates in the first place, armed with this information on its current, sorry state.