LegiStorm

Summary:

The estate tax is imposed on bequests at death, whereas the gift tax applies to inter vivos (during life) gifts. A certain amount of combined estates and gifts—$5 million in 2011, indexed for inflation—is exempted from taxation by the federal government. The American Taxpayer Relief Act (ATRA; P.L. 112-240) established permanent rules for the estate and gift tax for 2013 and subsequent years. The tax revision of 2017 (P.L. 115-97), commonly known as the Tax Cuts and Jobs Act (TCJA), temporarily doubled the exemption levels. This increase expires after 2025, absent legislative change. With indexation, the exemption amount was $5.49 million in 2017, and with the temporary doubling of the exemption and inflation adjustments, it is $13.16 million in 2024. The taxable estate is subject to a 40% rate. The exemption applies to total bequests and gifts (separate from the annual inter vivos gift exemption of $18,000 per donee for 2024). Transfers between spouses are exempted, and any unused exemption can be inherited by a surviving spouse. Other elements of the tax remain, including deductions for charitable bequests and a number of special provisions for farms and small businesses. Farms and small businesses are eligible for deferral of tax payments; valuation (with limits) based on use rather than market value; and, in the case of farms and landowners, contributions of conservation easements (with limits). The rate of the tax and the level of exemption have been subject to legislative changes in recent years. Since these changes began in 2001 with an increase in the exemption amount, the share of decedents paying an estate tax has declined from 2.1% of the population to 0.07% in 2019. This share is expected to rise to about 0.2% when the TCJA’s increased exemptions expire. Estate tax rates also fell during that period, from 55% in 2000 to 40% currently. As a result of the exemption increases and rate decreases, the tax as a percentage of GDP fell from 0.3% in 2000 to 0.1% currently. The share is expected to rise to 0.2% when the increased exemptions expire after 2025. Policymakers have raised concerns about the effect of the tax on farms and family businesses. About 0.2% of operating farms were estimated to be subject to the estate tax, rising to 1% when the exemptions expire. The share of estates with more than half of assets in businesses subject to the tax is estimated at 0.09%. Over half (60% of returns and 55% of the value) of estates over the filing threshold in 2019 (the last year for which year-ofdeath data are available) paid no estate tax, primarily because of the marital deduction, and to a lesser extent the charitable deduction. The average rate of tax paid on taxable estates was 19%, including a 1.7% rate from the gift tax. Nontaxable estates paid 0.3% in gift taxes. One justification for the estate tax is that, because appreciated assets have a basis in the hands of decedents at the fair market value at the time of death rather than the basis of the decedents (generally cost of acquisition, minus depreciation in the case of depreciable assets), unrealized gains passed on at death are never taxed under the income tax. Some data suggest that unrealized gains are about 44% of the value of estates subject to filing requirements, and that gains are as high as 55% of value for very large estates. Other justifications for the estate tax are its progressive nature, its reduction in the concentration of wealth, and its encouragement of charitable bequests. Criticisms reflect general questions about the appropriateness of death as a triggering event for taxes, the argument that assets subject to the tax (except for unrealized gains) have already been taxed under the income tax, and the potential effects on saving and labor supply. Evidence, however, suggests that the saving and labor supplies of donors are not affected, but the tax increases the supplies of saving and labor generated by beneficiaries. Various proposals have been advanced to revise the treatment of estates, including making the higher exemption levels permanent, repealing the tax, lowering the rate, or introducing higher graduated rates and lower exemptions. There have also been proposals to tax capital gains at death. A number of proposals to address more narrow provisions have also been advanced. Some would increase limits on valuation discounts for farms and family businesses, as well as limits on the deduction of conservation easements. Others are aimed at avoidance mechanisms, restricting the benefits of grantor trusts, disallowing minority discounts (for estates left to a family partnership), and other minor aspects of the estate and gift tax.