Election Results Will Be Key for The Debate Over Estate Tax Changes In 2025
Individual income tax provisions enacted as part of the 2017 Tax Cuts & Jobs Act, including a doubling of the estate tax exemption, expire at the end of 2025, setting the stage for a big debate on tax policy next year. The outcome of November’s presidential and congressional elections will be key as to what tax policy changes are enacted.
The Tax Cuts and Jobs Act (TCJA) doubled the estate and gift tax exemption, which is indexed for inflation, from $5 million to $10 million beginning in tax year 2018. For the 2024 tax year, the exemption is $13.61 million for individuals and $27.22 million for married couples. The higher exemption level expires on Dec. 31, 2025. If no action is taken, the exemption will be cut in half, returning to the 2017 level indexed for inflation. We expect tax legislation to be enacted in 2025 given that both parties want to extend the TCJA tax cuts for the middle class (those earning less than $400,000). However, which tax cuts are extended, for how long, and what tax increases might be paired with them will depend on the November elections.
Former President Trump would like to extend all of the tax cuts in the TCJA, including the higher estate and gift tax exemption.
Vice President Harris has generally endorsed the tax proposals included in President Biden’s FY25 budget, though she has proposed a lower capital gains tax than Biden (28% on those earning $1 million or more). Those tax proposals would allow the higher estate tax exemption to expire, but also include other changes to the estate tax, including the following:
- A total restructuring of estate taxes by taxing unrealized gains at death above a $5 million exemption ($10 million joint).
- To prevent trusts from avoiding the generation-skipping transfer (GST) tax in perpetuity, limiting the benefit of the GST exemption to beneficiaries who are no younger than the generation of the transferor’s grandchild or who are members of a younger generation who were alive at the creation of the trust.
- To avoid zeroed-out Grantor Retained Annuity Trusts (GRATs):
- Requiring the remainder interest in a GRAT, at the time the interest is created, to have a minimum gift tax value of the greater of 25% of the assets or $500,000.
- Prohibiting a decrease in the annuity during the GRAT term.
- Prohibiting the grantor from acquiring an asset held in the trust via an exchange without recognizing the tax gain or loss.
- Requiring a minimum 10-year term and a maximum term of the life expectancy of the annuitant plus 10 years.
- Treating a trust’s purchase of assets from or interest in a trust subject to GST tax and any other property subject to GST tax as a change in trust principal that would require the redetermination of the purchasing trust’s inclusion ratio.
STRATEGAS OUTLOOK
We do not anticipate major changes to estate taxes under any election scenario and we believe the estate tax will be extended at current levels. The greatest risk to this outlook would be if Democrats have full control of Congress in 2025. However, it’s important to note that President Biden tried to change the estate tax when Democrats controlled both chambers of Congress in 2021, but Democrats representing areas with large land holdings blocked the proposals. At worst, if the Democrats control Congress in 2025, the estate tax exemption could fall to $10 million and/or other changes to estate tax rules, like those listed above, could be enacted. Under full Republican control of Congress, we expect an extension of the current exemption level and no other changes to the estate tax. Similarly, with split-party control of Congress, we expect an extension of the current exemption level and no other changes to the estate tax. Nevertheless, it is important to be prepared for the potential for tax changes and we will be looking to the election results for any changes to our 2025 outlook.
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