Estate and trust attorneys (and our clients) were anxiously awaiting President Trump’s budget proposals on the estate tax.
We now have some clarity going forward.
Where Do Things Presently Stand
Under present federal law, deceased individuals can pass an unlimited amount of wealth to a surviving spouse or charitable beneficiaries.
For wealth passing to others besides a surviving spouse or charity, the first $13,990,000.00 of wealth is exempt from federal estate tax.
Under the doctrine of portability, if a surviving spouse does not remarry, at the time of his/her death, the surviving spouse can combine his/her exemption with any amount of the exemption that the first spouse did not use. As such, if the first spouse left everything to the surviving spouse (meaning all was exempt), the surviving spouse can combine his/her $13.99 million exemption with the deceased spouse’s $13.99 million exemption. Married couples can therefore regularly pass $27.98 million free of federal estate tax.
Every dollar in excess of the exemption is subject to federal estate tax. The federal estate tax rate is one of the highest on the books at 40%.
What Was Going to Happen?
The present federal estate tax exemption is the result of the 2017 Tax Cuts and Jobs Act (the “TCJA”).
The TCJA greatly increased the estate tax exemption, which, at the time of its passage, was $5,000,000.00.
However, the TCJA is set to sunset on December 31, 2025. If the TCJA sunsets, the federal estate tax exemption would revert back to the 2017 amount of $5 million, indexed for inflation since 2017. Most project that the effect of the TCJA sunset would be to reduce the federal estate tax exemption from $13.99 million to roughly $7.5 million.
What Does President Trump’s “One Big Beautiful Bill Propose?
Under Section 110006 of the Bill, President Trump proposes resetting the federal estate tax exemption at $15,000,000.00, effective January 1, 2025.
Each successive year, the federal estate tax exemption would increase in an amount indexed for inflation.
Married couples would still be able to take advantage of “portability”, offering the opportunity to effectively double the estate tax exemption to $30 million per family.
Isn’t the Bill Still Under Debate?
The passage of the Bill as presently written is no sure thing. However, the primary areas of controversy under the Bill relate to other provisions, including tax rates on high earners and deductions for state and local taxes paid.
As such, given Republican control of the House and Senate, and given that the estate tax provisions within the Bill have largely flown under the radar, we anticipate that the federal estate tax exemption will likely increase to $15,000,000.00 in 2025.
What Else Should I Know?
A few other important things to remember:
- The federal estate tax exemption only applies to U.S. citizens and permanent residents (green card holders). Non-citizen, non-permanent residents face an estate tax exemption of only $60,000.00.
- District of Columbia and Maryland residents still must plan for the state estate tax. Each jurisdiction’s exemption is significantly lower than the federal exemption ($4,873,200 in the District without portability; $5,000,000.00 in Maryland with portability). However, each jurisdiction’s highest estate tax rate (16%) is significantly lower than the federal estate tax rate of 40%.
- The estate tax exemptions—both state and federal—can change. As such, it is important to continue to review your estate planning documents every few years and check in with your planning attorney to make sure that there have been no changes to estate tax laws that may warrant updates to your plan.
Jeremy Rachlin and Liz Farley, the estate attorneys at Bulman Dunie, regularly monitor developments in state and federal estate tax laws. Call or e-mail us anytime if you would like to schedule a review appointment or discuss how estate tax laws may bear upon your estate plan.
