The Federal Estate Tax Exemption

Contents

1. Where the number came from
2. The years the number moved
3. Portability and the plans written for other eras

Brent O’Mara works with business owners and multigenerational families, and when that work reaches past the portfolio it often lands in tax strategy, where one number governs more than any other. The number is set in one place. The federal estate tax exemption, the amount a person may pass at death before the tax applies, is written by Congress and rewritten whenever Congress chooses, and over the past four decades the setting has moved from six figures to eight. The American Bar Association records the most recent large move: in December 2017 Congress raised the gift, estate and generation skipping exemptions to $10 million through 2025, indexed for inflation, which made the figure $11.18 million for 2018.³ Every estate plan drafted before that date was drafted against a different number.

Where the number came from

The Congressional Budget Office traces federal taxes on transfers of wealth at death to 1797, when they were first enacted to raise revenue in a time of crisis, and dates the current form, an estate tax, to 1916. A gift tax followed in 1924 to stop wealthy people from avoiding the estate tax by giving property away while alive.¹ The three taxes, on estates, gifts and generation skipping transfers, are linked, and the bar association explains the linkage: any exemption used during life for taxable gifts reduces what remains at death, while transfers between spouses are unlimited and use no exemption at all.³

The tax has never reached many people. The budget office reported that since 1977 fewer than 2 percent of adults who die each year have left taxable estates, and that in 2007 about 17,400 taxable returns were filed, representing roughly 0.7 percent of adult deaths the year before.¹ Its 2021 description found the share smaller still: of the 2.7 million people who died in 2016, about 5,500 left taxable estates, about 0.2 percent, and in 2021 estates faced a 40 percent rate on value above $11.7 million.² The two taxes together brought in a tenth of a percent of gross domestic product in 2020.²

Figure

How few estates pay

people who died in 2016

2.7 million

estates of those people that were taxable

about 5,500

share of all estates that year

0.2%

rate on value above $11.7 million in 2021

40%

The years the number moved

The modern history begins with a 2001 law that phased the tax down by raising the exemption and lowering the top rate. By 2009 the exemption was $3.5 million and the top rate 45 percent; the tax was repealed for 2010 alone; and it was scheduled to return in 2011 at $1 million and 55 percent.¹ The Chicago Tribune reported the 2009 figure as it applied to families, $3.5 million per person or $7 million for a couple, alongside a separate $1 million lifetime gift exemption.⁸ The 2010 lapse was real. Accounting Today recorded that the tax was technically not in effect that year, that Congress reinstated it in December 2010 and let estates of people who died in 2010 choose between the 2009 and the 2011 rules, and that the IRS commissioner called the result not optimal.⁹

The December 2010 law set the exemption at $5 million for 2011 and $5.12 million for 2012, but as the Journal of Accountancy warned at the time, the provisions were scheduled to expire at the end of 2012, with a possible return to $1 million for deaths in 2013 and later.⁵ Instead the figure was made permanent and indexed: $5.25 million for 2013, rising each year to $5.49 million for 2017, before the 2017 doubling.³ CNBC reported the Internal Revenue Service’s announcement of $13.99 million for 2025, up from $13.61 million, and noted that without action from Congress the higher exemption would expire after 2025 and revert to 2017 levels adjusted for inflation.⁷ Kiplinger’s guide to the gift tax then reported a lifetime exemption of $15 million per person for 2026, $30 million for a married couple, beside an annual gift exclusion of $19,000 per recipient and gift tax rates running from 18 to 40 percent.¹⁰

Figure

The exemption by year, in millions of dollars

• 20115
• 20125.12
• 20135.25
• 20145.34
• 20155.43
• 20165.45
• 20175.49
• 201811.18

The pattern is the point. A plan drafted in 1997 anticipated a six figure exemption; one written in 2009 anticipated $3.5 million; one written in 2012 anticipated a possible fall to $1 million; one written in 2022 anticipated a scheduled drop to about $5 million indexed in 2026, which the journal described as already on the calendar.⁶ None of those numbers held. The executor who must apply whichever figure governs the year of death is described in the duties of an executor, and the related rule that resets the cost basis of inherited property is covered in step up in basis.

Portability and the plans written for other eras

The second structural change arrived with the number. From January 1, 2011, a surviving spouse may use whatever exemption the first spouse to die did not use. A fellow of the American College of Trust and Estate Counsel describes portability in a video as a way for spouses to combine their exemptions: the survivor picks up the unused exemption of the deceased spouse and adds it to his or her own.⁴ It is not automatic. The deceased spouse’s estate must file a federal estate tax return making the election, due within nine months of death, even if no tax is owed.⁴ The limits matter too: the generation skipping exemption is not portable, many state estate taxes do not allow it, and only the unused exemption of the last deceased spouse counts.⁴

Before 2011, the journal explained, couples with assets above the exemption used credit shelter or bypass trusts: at the first death, an amount equal to the exemption passed into a trust for the survivor’s benefit, preserving the first spouse’s exemption, while the rest passed to the survivor under the unlimited marital deduction.⁵ Plans of that kind frequently failed in practice, because the spouse who died first held too little property to fund the trust, or the assets were retirement accounts that could not be moved between spouses.⁵ Portability was designed as a cure for incomplete planning after the fact.⁵

Figure

Two ways to use both spouses exemptions

	Bypass trust	Portability election
When it is set up	Drafted during life, funded at the first death	Elected by the executor after the first death
What it requires	Trust accounting and annual returns	A complete Form 706 filed on time
Growth after the first death	Stays outside the survivor's estate	Lands in the survivor's estate
Second step up in basis	No, only at the first death	Yes, in the survivor's estate
Generation skipping exemption	Can be allocated	Not portable

The trade between the two approaches is laid out in the journal’s 2022 article on married couples. A bypass trust keeps later appreciation out of the survivor’s estate, shields the assets from the survivor’s creditors and controls where they go; portability avoids the cost of creating, funding and administering a trust and allows a second step up in basis in the survivor’s estate, which trust assets do not get.⁶ The same article described couples who had simply left everything to each other and titled property jointly, and reminded them that the marital deduction defers estate tax rather than avoiding it, and that without a return electing portability the first spouse’s exemption could be lost for good.⁶ A will or living trust that funds a bypass trust by formula, drafted when the exemption was $600,000, can today sweep nearly everything a couple owns into a trust the survivor never wanted. Whether any of it matters to a given estate depends on the family’s circumstances; qualified professionals in tax and in law read the numbers before anyone acts.

The echo runs back to the beginning. The budget office noted that the first federal death taxes were enacted to raise money during crisis or war, were modified periodically ever since, and have supplied only 1 to 2 percent of federal revenue in most years.¹ A levy born of emergency and reset by each Congress that follows will keep moving, and every plan that names a number instead of a formula, or a formula instead of a number, is a bet on where the next Congress leaves it.