federal estate tax exemption

Written by AnnaMarie Poole, Law Fellow, National Agricultural Law Center 

Background Info

In 2017, the Tax Cuts and Jobs Act substantially raised the federal lifetime gift and estate tax exemptions, nearly doubling the previous limits.  As of 2024, individuals can transfer up to $13.61 million, and married couples up to $27.22 million, without facing federal estate tax.  This increased exemption has provided significant tax relief by allowing larger portions of estates to be passed on tax-free.  However, this benefit is temporary and is scheduled to end on December 31, 2025.  After this date, the exemption will revert to the 2017 level of $5.49 million, adjusted for inflation¹, which would reduce the amount that can be transferred tax-free in one’s estate. 

The estate tax exemption was raised in hopes of reducing the financial burden on higher wealth families, many of whom argued that the previous exemption levels led to “double taxation” on already-taxed assets, which harmed family-owned businesses and farms.  Also, by reducing estate tax liability by raising the exemption, it was hoped that people benefitting from the higher exemption would invest more of their wealth rather than redirect it toward complicated estate planning or tax-avoidance strategies.  The argument was this would help stimulate the economy. 

Opinions vary widely on what will happen to the estate tax exemption after 2025.  Some believe that Congress will extend the current higher exemption limits, which would keep the thresholds at or near the 2024 levels to continue providing tax relief.  Others expect the exemption to revert to the pre-2017 level, adjusted for inflation, which would result in a significantly lower threshold that will subject more estates to federal taxes.  Some predict a compromise, with the exemption being set somewhere between the current amount and the original amount, which would allow for a middle-ground approach that would balance tax revenue needs with estate planning concerns.  Finally, some propose lowering the exemption even further than the 2017 level and increasing tax rates.  Let’s look at each of these scenarios.

Option #1: Extend the Current Limit 

One prevailing thought is to extend the estate tax exemption due to its minimal contribution to overall federal revenue and its limited impact on reducing deficits.  Over the past 50 years, the estate tax has consistently accounted for less than 3% of total federal revenues.  In 2020, it raised just $17.6 billion out of $3.5 trillion in federal revenue, enough to cover only about a day’s worth of federal spending.  Given its relatively small role in funding government operations, many argue that the economic benefits of preserving wealth, protecting family-owned farms and businesses, and encouraging investment outweigh the limited revenue gains from allowing the exemption to expire.  This perspective suggests that maintaining the higher exemption would continue to promote economic stability without significantly affecting the federal budget.

Option #2: Revert to Original Limit

Historically, the estate tax has been used as a tool to prevent the excessive concentration of wealth and political power.  However, due to recent changes, only about 0.2% of estates are currently taxed, and the average tax rate on inherited wealth is just 2%.  Proponents of a lower exemption argue that reverting to the original exemption level would restore the estate tax’s role in curbing wealth inequality and funding public services.  Additionally, with an estimated $80 trillion in wealth set to be transferred from baby boomers to their heirs in the next two decades, a lower exemption could ensure that a larger portion of these inheritances is taxed. 

Option #3: Middle Ground

Another potential solution for estate tax reform could involve finding a middle-ground exemption level that lies between the current higher threshold of $13.61 million per person and the previous lower amount of $5.49 million, adjusted for inflation.  This would allow for more moderate estates to pass on assets without facing significant tax burdens while allowing larger estates to still contribute to public revenues.  Adjusting the exemption this way could protect smaller inheritances while ensuring fair contributions from estates of higher value.

Another middle-ground option would be to maintain the current exemption of $13.61 million per person but introduce a slightly increased tax rate on any amount exceeding this threshold.  Currently, estates over the exemptions are taxed at a rate between 18% to 40%.  By raising the tax rate but keeping the exemption, there would still be protections for most estates but those exceeding the exemption contribute a bit more to the tax system.  By making this adjustment, the policy could protect inheritances and generate necessary government revenue.  

Option #4: Lower the Original Limit

Another option is to reduce the estate tax exemption to an amount lower than the 2017 level and/or increase the estate tax rates.  An example of this approach is found in the American Housing and Economic Mobility Act of 2024, introduced in the Senate by Elizabeth Warren (D-MA) and in the House by Emanuel Cleaver (D-MO).  The bill outlines various affordable housing initiatives aimed at lowering costs for renters and buyers, while proposing modifications to estate and gift taxes to fund these measures.  Some proposed modifications to estate and gift taxes include:

• Lower the estate tax exemption to the 2009 amount of $3,500,000
• Replace the current estate tax rate of 40% with progressive rates
  • Tax rate of 55% for estates valued between $3,500,000 and $13,000,000
  • Tax rate of 60% for estates valued between $13,000,000 and $93,000,000
  • Tax rate of 65% for estates over $93,00,000
  • Additional 10% tax for estates over $1 billion 
• Reduce the annual gift tax exclusion from $18,000 to $10,000

While this type of legislation seems unlikely to pass Congress, there is a vocal minority that would like to see estate tax exemptions significantly reduced.

Who Can Make Federal Tax Law Changes?

The President does not have the authority to unilaterally change estate tax exemptions or make permanent adjustments to the tax system; those decisions are made by Congress. While the President can propose or advocate for specific tax policies, it is Congress that drafts, debates, and enacts tax legislation. As the federal estate tax provisions are set to expire in 2025, any adjustments to exemption levels or tax rates will require congressional approval. Lawmakers may choose to extend the current exemption, revert to previous thresholds, reach a compromise, or adopt a new approach. However, while the President can influence this process, direct control remains with Congress.

What This Means For You

As of now, it is impossible to know what will come on January 1, 2026.  However, it is not too late to utilize the current estate and gift tax limits.  In the upcoming year here are some things you should consider:

1. Gifting: Gifting can be an effective way of reducing estate tax liability but there are many tax and estate planning implications.  For a detailed discussion of gifting, see the Gifting To Reduce Federal Estate Taxes bulletin available here.
2. Consulting with an Estate Planning Attorney: An estate planning attorney can help set up the best plan for you and potentially utilize the current exemptions while they are still available. 
3. Reviewing Your Current Plan: You should make sure your current estate plan reflects your goals and takes advantage of the current higher exemption before it potentially decreases.  
4. Staying Informed: As the tax laws potentially change in the upcoming year, you should stay informed about issues that could impact your estate plan and your family’s finances. 

¹ The adjusted for inflation exemption is expected to be between $7 million and $7.5 million.