What is an Estate Tax
Under Federal law, when a person dies, the government assesses a tax on assets transferred to the person’s heirs/ beneficiaries if the total fair market value of the Estate after certain liabilities and expenses are deducted is worth more than a specific amount. That amount varies year-to-year based on current legislation and the current inflation rate. Those who pass away with Estates valued under the Tax Exemption amount for that year do not have to have their Estate pay the Estate Tax. Through proper planning, an Estate Planning Attorney can help you avoid passing on this tax to your loved ones.
Estate Tax History
The “Estate Tax” as we know it, has been around in some form since 1916. Exemptions from that tax have also increased over the years, and Estates have increased in value due to inflation. In 1986, the Exemption was $500,000. Later, the Estate Tax Exemption rose to $5 million per individual, which was then adjusted for inflation in 2017, to $5.6 million, before the current Exemption went into effect with the passage of the 2017 Tax Cuts and Jobs Act (TCJA). That Act increased the Exemption to about double what it was prior to its passage in 2017 – $12.92 million.
Currently, and through the end of 2025, the Estate Tax Exemption amount is $13.99 million per individual, and with a proper Estate Plan and tax advice, a spouse may be able to take advantage of a deceased spouse’s Exemption as well as his or her own exemption, so that the combined Exemptions would be useable by the surviving spouse increasing the protection from taxes to $27.99 million.
However, the current Exemption value, $13.99 million, was set to “sunset” and revert to its pre-TCJA value ($7 million after inflation adjustment) at the end of 2025. Recently, because of this, many were told they must use strategic planning now to take advantage of the Estate Tax benefits before the Exemption decreased substantially. However, with the passage of the One, Big, Beautiful Bill Act (H.R. 1), the Bill not only stopped the amount from reverting to 2017 levels but increased the Exemption amount above the current $13.99 million and eliminated the “sunsetting” provision to make the Tax Exemption permanent.
Estate Tax After Passage of the “One, Big, Beautiful Bill Act”
Title XI, Section 110006 of the Bill, among other tax exemptions and permanent changes to the Tax Code, increases the base Estate Tax, and the generation-skipping transfer tax exemption amount after 2025 to $15 million, to be adjusted for inflation. Thus, with a spouse’s Estate Tax Exemption being utilized, the total Exemption available to a married couple increases to $30 million before any Estate Tax kicks in. As noted above, Congress made this change permanent, rather than adding another “sunset” provision years down the road to navigate. This change will add certainty in planning for tax consequences for those with larger Estates going forward.
These changes in the law obviously benefit those with larger Estates. Nevertheless, the increased exemptions effectively shelter many Estates and families completely from any Estate Tax burden that could have applied had the laws reverted to lower exemptions. Even with this new protection, individuals and married couples should still be mindful that putting together a properly structured Estate and Trust Plan is still needed to provide for all available protections for the family, aside from just taxes.