A change that Congress is considering to the estate, gift, and generation-skipping transfer tax regimes could give families and their advisers more confidence that their estate plans will continue to reflect decedents’ intent.
The House approved a tax bill on May 22 that would reduce the number of estates required to pay federal estate tax by permanently raising the unified tax exemption amount from the $10 million in the 2017 Tax Cuts and Jobs Act (now $13.99 million adjusted for inflation), to $15 million per person starting Jan. 1.
Families can use the exemptions for lifetime gifting and/or transfers at death through a taxpayer’s estate.
The proposed tax bill would benefit more taxpayers and provide more stability in implementing estate plans because the exemption amount, along with an annual inflation adjustment, would be permanent. Keeping the estate, gift, and generation-skipping transfer tax rates and exemption amounts unified also would simplify planning because a trust could be set up to use the entire amount of the exemptions at the same time.
Unified exemptions and rates help advisers review prior taxpayer transactions. Before 2004, estate and gift tax had one exemption amount and generation-skipping transfer tax had a different exemption amount—and 2010 had different rules for all three and temporary changes to the income tax basis rules.
Generation-skipping transfer tax has been enacted since 1985 but has its own complexities, so reducing any differences helps the planning process.
Families that transfer amounts above the exemption could face a 40% tax rate, assessed depending on the time of the transfer and the receiving beneficiary. This would remain the same under the proposed tax legislation, meaning families wouldn’t need to unduly rush estate planning due to rising rates or put off estate planning if rates were to decrease.
The current exemption amount has a small percentage of the US population that is subject to or is filing estate tax returns. Estate tax returns were filed for only about 0.25% of that year’s decedents, and only about 0.14% actually paid an estate tax, according to 2022 IRS statistics, the most recent available. More than half of the taxable estate returns that year had a gross estate, after accounting for lifetime gifts, under $20 million.
Increasing the exemption amount to $15 million per person could then greatly reduce that already small percentage of taxable estates. The proposed permanent annual inflation adjustment helps stabilize the number of estates subject to transfer taxes and reduces legislative need to make periodic adjustments to the exemptions.
The generation-skipping transfer tax affects an even smaller subset of the population. This tax is imposed on certain distributions of assets or income to beneficiaries that are more than one generation below the grantor.
Because there are generally numerous individuals in a family—each with their own estate, gift, and generational-skipping transfer tax exemptions—it usually takes wealth greater than the combined exemptions for two generations before transfers are usually subject to any generation-skipping transfer tax.
While increasing the estate, gift, and generation-skipping transfer tax exemptions may seem more complicated than simply eliminating the estate and generation-skipping transfer tax as was proposed (due to how most high-net-worth individuals have structured their planning based on the historical transfer tax regime), this could have created situations where grantor intent may not have been fulfilled.
For ultra-high net worth families, it’s important to periodically review estate planning to help ensure it still aligns with their goals while being tax efficient.
Estate plans should be reviewed when there is a change to legislation, like the proposed, when the taxpayer has updated their goals, when there’s been additions to the family or an anticipated divorce, or a potential business sale or other significant modification in assets.
The proposed tax bill would increase the transfer tax exemptions by over $1 million from 2025 to 2026, creating an opportune time to review estate plans to find how taxpayers could use the increase to their favor.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Abbie M.B. Everist is principal in BDO’s national tax office, private client services.
Write for Us: Author Guidelines
To contact the editors responsible for this story: