“Nothing is certain except death and taxes” – the estate tax in flux and the road ahead

Today, while death remains certain, the future of the US estate tax is uncertain. Several countries have repealed or eliminated their inheritance or estate tax, including Australia, Israel, Mexico, and Russia, to name a few. 

The recent US federal election shifted control of taxation to the Republican Party, which has long opposed the estate tax. Republicans have argued that a person’s assets at death have “already been taxed as income”. 

However, this overlooks the appreciation of assets that occurred after the assets were acquired. The increase in value of those assets over time is not subject to income tax until the assets are sold. 

Politicians who oppose the estate tax have also argued that the estate tax forces traditional, hardworking families to “sell their farms” when Dad dies, in order to pay the estate tax. However, there is no evidence that a single farm has ever been sold for this purpose. The Internal Revenue Code specifically allows families to pay the estate tax over a 14-year period to avoid the forced sale of a family farm or family business.

To market their opposition to the estate tax, the advocates have renamed it the “death tax”.  A large portion of the American population has been won over, even though the value of their estates is far below any past or current threshold for estate tax. Politicians have successfully caused the slow death of the estate tax by numerous cuts to the estate tax threshold and reductions in the rate of the estate tax. The threshold for the US estate tax was once USD 120,667. In 2024, that threshold will be nearly USD 14 million for each US person, and would be close to USD 28 million for a married couple. The estate tax rate was once 70%; the top rate of estate tax is now only 40%.

So, what will happen now? The tax act of 2017 introduced the large estate tax exclusion which will be almost USD 14 million for each US person in 2025. 

However, the tax act of 2017 also provided that this large estate tax exclusion will automatically be reduced to about USD 7 million per person on 01 January 2026. This means that if Congress does nothing, the threshold to pay estate tax will automatically decline to about USD 7 million per person. More estates will be subject to estate tax than are currently, resulting in more revenue for the federal government. However, an increase in the amount of the so-called death tax is the opposite of what some politicians have championed for years. 

The new majority in Congress will have to balance the tax promises that they have made. On the one hand, some politicians continue to berate the “death tax”, and want to lower the estate tax as much as possible. However, they have also promised large reductions in income tax, such as eliminating income tax on social security, tips, and overtime pay. They probably cannot deliver deductions in both the income tax and estate tax, and still run the government. So, stay tuned for some compromises.

Uncertainty about the federal estate tax should not prevent or postpone estate planning. If possible, giving away assets during life can reduce a taxable estate. A trust and estate attorney can recommend strategies that maximise the reduction of the taxable estate.

Everyone should have a Will, and possibly a revocable trust. A Will ensures property is distributed as desired, names an executor to manage the estate, and appoints guardians for minor children. A Will can also provide for disabled children of any age.

A trust agreement can protect family assets from creditors, including divorce claims against every generation of a family. Additionally, some states impose estate or inheritance taxes, which a well-structured Will or trust may help minimise.

---

Diane K. Roskies is a principal attorney at Offit Kurman in New York, and advises US and multinational citizens on US and international trust, estate planning, and administration, often involving multiple jurisdictions. Diane represents high-net-worth and ultra-high-net-worth individuals and their families, including those with assets valued at over USD 2 billion. Diane publishes the blog “Lost in Translation: Blunders in International Estate Planning”.