Federal Estate Tax Update
DEAR TRUST OFFICER:
I understand that the amount exempt from federal estate and gift tax will drop in half at the end of the year. Any chance that this will not happen? —TAX TARGET
DEAR TARGET:
Predictions are hard, especially about the future, as a great man once said. On the one hand, Congress has never allowed a drop in the exemption amount from federal estate and gift tax to happen. On the other hand, extending the current exemption would seem to benefit “the rich,” so there could be resistance to such an extension.
There is yet another possibility. On February 13, 2025, the Death Tax Repeal Act was introduced by Republicans in the House and Senate, with more than 200 supporters. The bill would entirely eliminate both the federal estate tax and the generation-skipping transfer tax. In the current draft, the federal gift tax would be retained and the current lifetime exclusion extended, so as to limit the opportunity for income shifting within a family. The gift tax rate would fall to 35%. Step-up in basis at death would be retained.
Despite the significant support for repeal in Congress, the prospects for the legislation are very uncertain. It would have to be evaluated in the context of additional tax measures under consideration. Many questions are yet to be resolved, including:
- Would death be a realization moment for capital gains?
- What effect would repeal have on existing formula clauses in marital and charitable bequests? Could surviving spouses be inadvertently disinherited?
- What effect would repeal have on existing Qualified Domestic Trusts and Qualified Terminable Interest Property trusts?
- What happens to dynasty trusts?
The largest imponderable in repealing the federal estate tax might be projecting what happens if a future Congress decides to bring the estate tax back.
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