The proposed changes include:

1. Reduced Federal Estate Tax Exemption. The federal gift and estate tax exemption, which is generally the amount of combined assets and prior taxable gifts a person can have at death without needing to file a federal estate tax return, would drop to $3.5 million per person. The gift and estate tax exemption under current 2024 law is $13.61 million per person, and it is scheduled to drop to $5 million plus inflation in 2026.
2. Increased Estate Tax Rates. The estate tax rate would increase to 55% on the amount above the $3.5 million federal exemption and up to $13 million, 60% on the amount above $13 million and up to $93 million, and 65% on any remaining assets above $93 million. The current estate tax rate is a flat 40%.
3. Surtax on Billion Dollar Estates. There would also be an additional 10% surtax on any amounts in taxable estates above a billion dollars.
4. Changes to Annual Gifting. The federal annual exclusion amount for gifts would drop to $10,000 per donee, meaning that an individual could gift up to $10,000 per recipient in a given year without federal gift tax consequences. For certain types of gifts (like transfers in trust, or gifts of an interest in a pass-through entity), the annual exclusion would be limited to a total of $20,000 in aggregate gifts covered by annual exclusions. The federal annual exclusion amount is currently $18,000 per donee, and annual exclusion gifts can be made to an unlimited number of recipients.
5. New Generation Skipping Transfer Tax Rule. Transfers to a trust with a beneficiary who is three or more generations below the donor would be subject to generation skipping transfer tax. Under current law, if generation skipping transfer tax exemption is allocated to transfers to a trust, any future distributions from the trust are shielded from generation skipping transfer tax.

There are strategies that can be utilized now to take advantage of the current estate tax laws and updates that can be made to estate planning documents if the laws do change as proposed. If you would like assistance with considering how the proposed tax law changes could impact your specific situation, please reach out to Allison Int-Hout, Ryan Montgomery, or any of the other estate planning attorneys at Montgomery Purdue.