Think a Repeal of the Estate Tax Wouldn’t Affect You? Wrong

WDC NEWS 6 STAFF May 18, 2025

13 9 minutes read

Think a Repeal of the Estate Tax Wouldn’t Affect You? Wrong

The federal estate tax affects only about 0.1% of Americans. However, the repeal of that tax could affect all of us.

This article addresses what you should know as Congress considers pending estate tax legislation. It also offers strategies for you to consider.

If the estate tax is repealed, you should review your estate plan to be certain that it will still provide your desired results during your life and at your death.

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About the federal estate tax

The federal estate tax, aka the death tax, is a very emotional topic. A “tax” at death seems at first blush to be excessively harsh. I grew up on a ranch, and I recall a family friend having to sell their ranch to pay the tax after their parents died.

This ranch had been in their family for generations, and the land value increased so much that the family could not afford to pay the tax and keep the ranch in the family.

In 1997, the estate tax was 55% on the value of assets owned by the decedent over $600,000. The estate tax at that time affected a large percentage of the population. The current estate tax is 40% on the value of assets owned by the decedent over $13.99 million (for a married couple, it’s $27.98 million).

On January 1, 2026, the amount that each person can transfer free of estate tax could be reduced by about one-half to about $7 million (or about $14 million for a married couple).

However, Congress is expected to enact a law to continue the current exemptions. Alternatively, it could repeal the estate tax altogether.

Even though very few people are actually liable for estate tax, the possible repeal of the federal estate tax may negatively affect all of us, depending on how the law is written. I am not taking any position on whether the repeal of the estate tax would be a good or bad thing to do. I am simply describing how this change may affect all of us.

Congress currently has two pending bills that would permanently repeal the estate tax. In politics, “permanently” means until a future Congress changes the law, possibly reinstating the estate tax.

What you should look for in a new law

Under current law, an asset’s basis is increased, or stepped-up, to the fair market value at the date of death. This provides a tax savings in two ways:

If the asset is sold at or near to the date of death, there is no tax on the capital gain.
If the asset is not sold, depreciation is based on the fair market value at the time of death. This provides a larger depreciation deduction and a higher return on investment or income from that asset.

An estate tax repeal could do away with this basis step-up at death. As a result, heirs would pay a substantially higher capital gains tax upon the sale of the inherited assets.

Even if the assets are not sold, the income tax basis would be much lower.

The depreciation deduction would also be lower, which would result in a lower return on investment or income from those inherited assets.

What is the basis step-up?

“Basis” is the technical term for the cost or value of an asset that is used to determine gain or loss if the asset is sold or exchanged. For example, if I purchase a building for $1 million and then sell that building for $10 million, then I would pay tax on $9 million.

On the other hand, if I inherited that building from my father, then the basis of $1 million (what my father paid for the building) would be increased to the fair market value at the time of his death. I could sell that building for $10 million and not pay any tax.

Estate tax repeal may also repeal the basis step-up

The technical reason for the basic step-up is to prevent double taxation. If an asset is included in a descendant’s estate, then an estate tax may be paid. Without the basis step-up, if the heir sold the asset, then they would have to pay a capital gains tax on the gain in value, even though an estate tax was also paid.

The capital gains tax would be applied even if no estate tax was required, because the total asset value was less than $13.99 million.

The bills in Congress do not specifically address whether the basis step-up rule would continue.

Note that the basis step-up applies to all inherited assets. For that to continue, any new law must specifically say so, and we cannot predict what Congress will do.

What happens with the basis step-up rule is the most important issue for over 99% of the U.S. population as part of a possible estate tax repeal.

For example, in 2025, individual taxpayers do not pay any capital gains tax if their income is $48,350 or less. If your income is more than $48,351 (up to $533,400), then your tax rate is 15% on long-term capital gains. Above $533,400, then the tax rate is 20%.

(A long-term capital gain is a gain on an asset held for over one year. This holding period includes the length of time the asset was held by the person from whom you inherited it.)

Under current law, if you inherit property with a basis of, or acquisition cost of, $50,000, and it is worth $500,000 at the time of the original owner’s death, then the taxable gain is zero.

But if there’s no longer a basis step-up rule, then the taxable gain would be $450,000. If you fall into the 15% bracket for long-term capital gains (which kicks in at income of $48,351), you would face a tax bill of $67,500. The gain may also be subject to state income tax.

This is why even people who don’t have large estates need to be aware of what happens with the basis step-up rule in the event that the estate tax is repealed.

Look for formula provisions in your trust, will or estate plan

Many older wills or trusts have “formula provisions.” A formula provision is language that determines an amount to be allocated to or inherited by an heir or beneficiary based upon the total estate value.

For example, an irrevocable trust may say that, upon the death of the first spouse in a married couple, the “maximum” amount that can pass free of estate tax is allocated to a trust for the benefit of the children. If so, then the entire estate does not go to the surviving spouse.

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Another version of the formula clause may say that the deceased spouse’s 50% share is allocated to a trust for the benefit of the children.

That structure was very common when the estate tax exemption was much lower. Such an irrevocable trust may be referred to in your estate plan as a “bypass trust” or a “family trust.” It may also be referred to as an “A-B trust” or “A-B-C trust.”

If such a provision is used, then the surviving spouse has limited access to the assets. The surviving spouse would pay higher tax on any capital gain or asset sold in the trust during his or her life.

The children or heirs would not receive the basis step-up and would pay higher capital gains tax when the assets are sold after the surviving spouse’s death.

There are many variations of these formula clauses, so you should have an experienced attorney review your trust or estate plan to be sure that such a provision is not in your plan.

Note that some states, such as California, do not have a capital gains tax rate, so all income is taxed to that state in the same manner and rate as ordinary income.

For federal estate tax purposes, the executor or the personal representative or trustee may choose to use the date of death value or, alternatively, the six-month anniversary date for estate tax valuation purposes. The date selected is also used for the basis for the asset(s) for income tax purposes.

If a formula provision is designed to reduce the federal estate tax to zero (which most do), then you cannot elect to use the alternative valuation date six months after the date of death. This reduces the family’s ability to choose the valuation date that provides the best possible tax result.

Also consider state estate tax impact

Twelve states and the District of Columbia have a state estate tax with the following exemption or exclusion amounts (or credit equivalents) in 2025:

Connecticut: $13.99 million
District of Columbia: $4,873,200
Hawaii: $5.49 million
Illinois: $4 million
Maine: $7 million
Maryland: $5 million
Massachusetts: $2 million
Minnesota: $3 million
New York: $7,160,000
Oregon: $1 million
Rhode Island: $1,802,431
Vermont: $5 million
Washington: $2,193,000

The specific language used in the formula provision will be critical in those states. Most formula provisions will address only the federal estate tax and disregard the state estate tax exemptions, which creates great complexity and a greater chance that an unfavorable result occurs.

Flexibility is critical

No one knows what the future estate and income tax laws will be when you die. Even if the estate tax is repealed now, it could be reenacted before your death. You also do not know what the value, type or character of your assets will be when you die.

A married couple — in particular a surviving spouse — must have the flexibility to make changes after the death of the first spouse to adjust or react to these changing conditions or laws.

Even if you are using an irrevocable trust for income tax, estate tax or asset protection purposes, it can be drafted to provide the ability to change, react or adjust for future changes. Your mantra should be: “You should control your trust, your trust should not control you.”

Many people do not actually understand what their trust or estate plan actually says when signed. The ability to change or adjust your plan in the future is critical.

Use a trust protector

The person who is your trustee owes a duty to your heirs or beneficiaries. The trustee also owes a duty to creditors, that the decedent’s bills, expenses and taxes will be paid. For that reason, a trustee cannot generally be used to effect needed change.

Your estate plan can provide for a trust protector to be appointed to make a wide range of adjustments that may be needed in your future. The trust or estate plan should provide a mechanism for that person to be appointed if needed.

If a trust protector is appointed, then the trust protector can make the adjustments, and then the trust protector would be removed or terminated.

Other provisions to consider to provide flexibility

When appropriate, the following provisions should be considered to build flexibility into an otherwise irrevocable trust or estate plan:

Permit assets of the same value to be exchanged or swapped
Provide that individual’s taxes paid can be reimbursed by the trust
Permit loans to the trust creator or settlor
Broad decent powers to permit changes without the need for a formal court order

Consider using grantor trusts if estate tax is repealed

A grantor trust includes special provisions that cause the trust to be ignored or disaggregated for income tax purposes. You continue to pay income tax attributable to the income-producing assets contributed to the trust on your personal income tax return.

Even though income is paid to the trust, the assets in the trust would not be included in your estate for federal estate tax purposes. The grantor trust is often called a “defective trust” because of the different treatment for federal income tax and federal estate tax purposes.

Because these trusts can provide a very beneficial result, I prefer to refer to them as being perfectly effective.

This type of grantor trust can also provide substantial asset protection in the event of lawsuits, divorce, creditor claims and even bankruptcy.

These trusts may provide protection if the estate tax is repealed now but returns in the future.

The repeal, or even just the potential repeal, of the estate tax is an important reminder to be sure that you actually understand what your estate plan says and to confirm that it will continue to work as desired.

You should review your estate plan with an experienced tax and estate planning attorney.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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