The Pros and Cons of an Estate Tax Repeal

The federal estate tax is a tax on the transfer of a person’s assets to their heirs after death. The tax is based on the fair market value of a person’s “gross estate,” which includes all assets like cash, securities, real estate, and business interests. After subtracting deductions like debts, funeral expenses, and charitable contributions, the “taxable estate” is subject to the tax if it exceeds a specific exemption amount. For 2025, this exemption is over $14 million per individual, but it is set to be reduced by roughly half in 2026 unless Congress extends current law, meaning the vast majority of estates owe no federal tax.

The concept of “repeal” refers to the complete elimination of this tax. The estate tax has been modified and even temporarily repealed in the past, only to be reinstated. A permanent repeal would eliminate the federal tax on wealth transfers at death, regardless of an estate’s size. This would alter a component of the U.S. tax system that has existed for over a century, sparking debate about its economic and social consequences.

Arguments for Repealing the Estate Tax

An argument for repealing the estate tax is the principle against “double taxation.” Proponents argue that estate assets were accumulated from income already taxed, such as through income or capital gains taxes. Taxing these same assets again at death is viewed as an unfair penalty on a lifetime of work and saving.

Another argument centers on the impact to family-owned businesses and farms. These enterprises are often asset-rich but cash-poor. When an owner dies, the estate may lack the liquid funds to pay the estate tax, which can be as high as 40% on the taxable amount. This can force heirs to sell or liquidate the business to pay the tax, disrupting continuity and causing job losses.

The estate tax is also criticized for discouraging savings and investment. The belief is that individuals, knowing their wealth will be taxed at death, are disincentivized from saving. This can lead to increased consumption or costly estate planning rather than deploying capital in ways that could fuel economic growth. Repealing the tax would unlock more capital for investment and simplify financial decisions.

Arguments for Retaining the Estate Tax

A justification for retaining the estate tax is its role in generating revenue. While it constitutes less than 1% of total federal revenue, it amounts to billions of dollars annually. Proponents argue that eliminating this revenue would increase the national debt or shift the tax burden to others, potentially through higher income or payroll taxes that affect a broader population.

The tax also serves as a tool to address wealth concentration. Large, untaxed inheritances can perpetuate economic disparities across generations. By taxing the largest estates, the government can reduce the concentration of wealth and fund public services that provide opportunities for all citizens. This frames the estate tax as a mechanism for fostering a more meritocratic society.

Supporters of the tax emphasize that it affects an extremely small fraction of the population. Due to the high exemption amount, only about two out of every 1,000 estates, or 0.2%, are required to pay any federal estate tax. Repealing the tax would therefore provide a financial windfall to a tiny number of wealthy heirs without benefiting most American families.

The estate tax also encourages charitable giving. The tax code allows for an unlimited deduction for bequests made to qualified charities. This incentivizes wealthy individuals to leave a portion of their estate to philanthropic causes, as doing so reduces their taxable estate and tax liability. Research indicates a repeal could cause a significant decline in charitable donations, impacting non-profit organizations nationwide.

The Step-Up in Basis and Other Tax Consequences

Currently, when an heir inherits an asset, its cost basis for tax purposes is “stepped up” to its fair market value at the time of the owner’s death. The “basis” is the value from which capital gains are measured when the asset is sold. This erases the capital gain that occurred during the owner’s life, allowing the heir to sell the asset immediately without owing capital gains tax on that appreciation.

An estate tax repeal would likely eliminate the step-up in basis, replacing it with a “carryover basis” system. With a carryover basis, the heir inherits the original owner’s cost basis. This means if the heir later sells the asset, they would be responsible for paying capital gains tax on the entire appreciation from the time the original owner acquired it.

For example, if a parent buys stock for $100,000 that is worth $1 million at their death, the current step-up in basis sets the heir’s basis at $1 million, and a sale at that price results in no capital gains tax. With a carryover basis, the heir inherits the $100,000 basis, and a sale for $1 million creates a $900,000 taxable capital gain. This change would create a record-keeping burden, as heirs would need to find the original purchase price of assets.

Repealing the federal estate tax would also affect the related gift tax and generation-skipping transfer (GST) tax. The gift tax prevents people from avoiding the estate tax by giving away assets before death. The GST tax applies to transfers to distant descendants to prevent families from avoiding the tax for multiple generations. A full repeal would likely include these related taxes for consistency.

The Political and State-Level Context

The debate over repealing the federal estate tax falls along political party lines. The Republican party platform supports repeal, arguing it harms the economy and family businesses. The Democratic party platform supports retaining the tax to reduce wealth inequality and generate revenue. This division creates an uncertain legislative environment dependent on election outcomes.

It is important to distinguish between the federal estate tax and state-level taxes, as a federal repeal would not affect them. Twelve states and the District of Columbia have an estate tax, while five states have an inheritance tax paid by the recipient. Maryland is unique in that it levies both types of taxes.

State taxes operate independently, with their own exemptions and rates. State exemptions are often much lower than the federal level, so some estates may owe state tax even if they owe no federal tax. For example, some states have exemptions as low as $1 million. Residents of these states would still need to plan for potential state tax liabilities.

Planning Strategies Amidst Uncertainty

Estate planning must prioritize flexibility due to the changing political and legal landscape. One tool for this is the use of disclaimer provisions in wills and trusts, which allow a beneficiary to formally refuse an inheritance. For instance, if the exemption is high, a surviving spouse might accept an inheritance. If the exemption is low, they could disclaim it, allowing assets to pass into a bypass trust to reduce future taxes.

Building flexibility into trust documents is another strategy. A trust can grant the trustee discretionary power to make distributions based on current tax laws, allowing the trustee to adapt to changes in the exemption or basis rules. A “trust protector” can also be named, giving a third party power to modify the trust in response to legal changes.

Regularly reviewing an estate plan is an important strategy in an uncertain environment. A plan that was optimal under one set of rules may become inefficient under another. Regular consultations with professional advisors, including an attorney and a tax professional, ensure a plan remains aligned with personal goals and current law.