Potential Impacts of Repealing the Estate and Generation-Skipping Transfer Taxes

This article was originally published in the American Bar Association, Probate & Property*, September 1, 2025, and is republished here with permission.

Recently, Republican lawmakers in the House of Representatives and the Senate introduced legislation that would repeal the estate and generation-skipping transfer (GST) taxes. While the process of repeal of these taxes may seem straightforward, it likely would create tax inefficiencies for estate plans already in place, or uncertainty implementing future plans, given the historical longevity of these taxes.

A tax on the value of estate assets has been part of the U.S. tax system for more than 200 years and for almost 100 years in its modern form (The Estate Tax: Ninety Years and Counting). The generation-skipping transfer (GST) tax was added to the Internal Revenue Code (IRC) more recently, with final enactment in 1985 (IRC Section 2601 et. seq.). 

Under current law, individuals benefit from a $13.99 million exemption on the transfer of assets either through lifetime gifting and/or at death, through the taxpayer’s estate. Separately, the IRC provides a $13.99 million GST tax exemption for transfers for the benefit of individuals more than one generation below the grantor–usually grandchildren and younger ($27.98 million per couple for both exemptions). The estate, gift, and GST taxes are all imposed at a flat 40% rate on amounts in excess of the exemption, assessed depending on the time of transfer and the receiving beneficiary. For 2022, the total net estate tax liability was about $22.5 billion, from approximately 3,900 taxable returns. Given that approximately 2.8 million people died in 2022, estate tax returns were filed for only about 0.14% of the population (IRS Publication 5332).

Some of the issues that may result from a repeal of the estate and GST taxes include: 

• Complexities for estates that use formula clauses or rely on portability; 
• Income tax inefficiencies from prior gifting that retains carryover asset basis; and 
• Difficulties for estates that require multigenerational wealth planning. 

This article reviews the potential estate planning issues and considerations that may arise during a period if substantial modifications to the historical transfer tax system in the United States are enacted. 

Formula Clauses

Formula clauses are commonly used for estates that may have an anticipated estate tax liability due to the exemption amounts and a goal to minimize taxes. Most estate planning documents for married couples contain formula clauses that cause the remaining estate and GST exemption amounts to pass to a family trust (also known as a bypass or credit shelter trust) with the remainder of the estate going to a surviving spouse or a marital trust. If there is excess GST exemption after funding the family trust, the marital trust often will be divided into exempt and non-exempt marital trusts. Most formula clauses for married couples defer any estate tax due until the death of the surviving spouse. There may be instances where it may be beneficial or within the grantor’s intent to pay some estate tax when the first spouse passes, but that should be carefully thought through and requires additional specific analysis. Similar formula clauses may also appear when making charitable bequests. These funding formulas are useful in taking advantage of the unlimited deduction provided for bequests to spouses or charity.

Unintended consequences may arise for estate plans that contain formula clauses if the estate tax and GST tax are repealed. In that event, the formula would likely cause the entire estate to pass to the family trust. Most likely, this result would be inconsistent with the decedent’s intent, which was to leave some assets to the spouse (or through the marital trust) or charity. When the option of electing to take the spousal share is available, surviving spouses may be forced to elect that option. Estate planners should consider revising estate plans to include dispositive provisions in case the estate and GST taxes are repealed. In addition, estate plan redrafting should also incorporate the potential of a future restoration of the estate and GST taxes, which is a possibility given the long history of inclusion of an estate tax in the country’s tax regime.

In addition to concerns over formula clauses, repeal of the estate tax would remove constraints on trusts necessary to qualify for the marital deduction. Clients, especially in community property states where each spouse has close to equal net worth, may be inclined to establish trusts that may sprinkle income among the surviving spouse and other intended beneficiaries, such as children, grandchildren, and others. Professional estate planners need to consider that such trusts may raise issues in states that have enacted elective share statutes to protect the surviving spouse.  

Portability

Some estate plans for married taxpayers who have a net worth that approximates the estate tax exemption amount use the portability rules instead of a formula clause. Estate plans that rely on the portability rules usually give most assets to a surviving spouse using the unlimited marital deduction and then file an estate tax return electing to add the deceased spouse’s remaining estate tax exemption to the surviving spouse’s estate tax exemption. If the estate tax were to be repealed, there would be no election to make. If a repealed estate tax was subsequently brought back through future legislation, the impact on portability during the period when the tax was repealed would need to be determined. 

Interaction with Income Tax

The Death Tax Repeal Act proposed on February 13, 2025 (“Repeal Act”) is significantly different from the one-year reprieve from estate tax that occurred in 2010, because estates in 2010 were still subject to the GST tax rules (although the GST tax rate was zero) and received very limited basis step-up for assets owned by the decedent at death. The Repeal Act would leave all basis step-up rules unaffected and repeal the GST tax. The top federal income tax rate for 2025 is 37% for ordinary income and 20% for long-term capital gains (with the possibility of an additional 3.8% net investment income tax). Many states impose their own individual income tax that when combined with the federal rate, creates almost an equal amount of benefit from the step-up as the estate tax repeal, albeit the benefit is deferred until assets are sold (with the exception of income in respect to decedent assets, most commonly traditional retirement accounts). Because of the small number of estates that are subject to estate tax, most estate planning has shifted to focus on basis planning to reduce the amount of income tax payable by beneficiaries when assets are later sold. This basis planning will become much more significant for the wealthy and ultra-wealthy if the estate tax and generation skipping are repealed with no change in the basis adjustment rules of IRC Section 1014.

These income tax rules apply to all taxpayers, whether they are subject to the estate tax or not. High-net-worth individuals benefit from this, as they may have wages or other sources of income to use during their lifetime, or they may take out loans against stock, which is an estate tax deduction. Then, at their death, the taxable gain in the value of the stock is essentially erased.

In anticipation of the exemption amount being cut in about half after 2025 because of the sunsetting of some Tax Cuts and Jobs Act provisions, for the past few years many taxpayers have been funding irrevocable trusts. These trusts may or may not include a spouse as a beneficiary (spousal lifetime access trust) and/or be taxed to the grantor for income tax purposes (intentionally defective grantor trusts), while being removed from the grantor’s estate for estate tax purposes. Transfers by gift to these trusts will receive carryover basis treatment, making them less advantageous for income tax purposes if the estate tax is repealed with no corresponding change to the basis step-up treatment for assets owned by the taxpayer at death.

Basis step-up is especially significant for depreciable assets because those are usually subject to depreciation recapture at ordinary, not capital gains, tax rates. With a step up in basis, already depreciated assets may actually be re-depreciated by the beneficiary if the assets are used in the scope of a business or income-producing activity. For partnerships or limited liability companies taxed as partnerships, not only is there a basis step-up for the value of the entity interest owned by the taxpayer at death, there’s also a possibility of a basis step-up for the pro rata ownership amount of underlying entity assets if an IRC Section 754 election is made or is in place. This election must be made on the partnership return that includes the partner’s date of death.

If, however, future legislation to repeal the estate or gift tax also were to remove basis adjustments under IRC Section 1014 or provide a limited adjustment similar to that included in the 2010 estate tax repeal, the impact would be felt by more taxpayers than just high-net-worth individuals. Due diligence would be required to determine the historical cost basis of bequeathed assets so that beneficiaries of a decedent’s estate could properly measure gain or loss when those assets are sold.

GST Tax

Repealing the GST tax would raise its own set of questions for families with multigenerational wealth. As mentioned above, each taxpayer has a $13.99 million GST exemption that they may allocate to lifetime gifts and/or to transfers at their death. Often, taxpayers will use this exemption to fund trusts and choose as the trust’s situs a state that has abolished or essentially abolished limitations on trust duration and provides extensive creditor protection for trust assets – frequently Nevada or South Dakota. 

Assets retained in GST-exempt trusts are generally exempt from additional levels of estate, gift, and GST tax for the entire trust duration. Assuming Chapter 13 (the GST provisions) is removed from the IRC, similar to 2010, the GST tax will be in effect zero, but there will no longer be a mechanism to allocate GST exemption to transfers to long-term trusts. If the GST is repealed, and taxpayers who already have contributed to so-called “dynasty trusts” wish to add additional funds to such trusts, it may be prudent to set up new trusts so as to not commingle pre- and post- repeal assets, given that the GST tax might be reenacted under a future administration without a grandfathering provision. 

Gift Tax

The proposed legislation does not call for the repeal of the gift tax. Presumably, the gift tax would act as a backstop to prevent the shifting of assets and income among family members to produce a lower income tax liability. Under the Repeal Act, taxpayers would continue to be limited to the inflation-adjusted gift exemption for transfers during life ($13.99 million for 2025); otherwise, a reduced 35% gift tax would be due on transfers in excess of the exemption. 

Under current law, gifting is tax advantageous for large estates because the amount of exemption used is determined based on the value of the gift on the date of the gift. For high-growth assets, the savings expected from estate tax would offset the carryover basis for gifts, instead of the basis step-up and related income tax savings if held in the taxpayer’s estate. This analysis would be harder to model for the period between the potential estate tax repeal and the possible reimposition of the tax by a future administration. The health and age of the grantor, along with the type and anticipated growth of the assets would be important factors in those analyses. 

Business Estate Tax Provisions

Along with the current $13.99 million per taxpayer estate tax exemption and the basis step-up, individuals who are business owners may also benefit from additional tax provisions. Business owners generally operate through an entity structure to help limit liability exposure. When these business entities are valued for estate and gift tax purposes, they typically receive marketability discounts, and possibly minority discounts, that allow more assets to pass through the taxpayer’s estate within the exemption amounts. As previously noted, the basis step-up on already depreciated assets is another benefit geared toward business owners and their successors, as they may re-depreciate those assets and offset ordinary income. 

Farmers and ranchers have historically received additional tax benefits, such as the IRC Section 2032A special use valuation rule that may provide an additional $1.42 million exemption for qualifying special use property, adjusted for inflation. Further, for farmers and ranchers some regular types of ordinary income that would normally be income in respect of a decedent and not receive a basis step-up may avoid income tax as well. For example, crops that have been planted and livestock that has been raised but have not been sold may receive a basis step-up, depending on the timing and the decedent’s participation.

When it comes to paying the estate tax liability, estates with closely held business interests may be able to elect to defer payment of the estate tax related to the business and make payments pursuant to IRC Section 6166. To qualify, the value of the closely held business interest must exceed 35% of the gross estate. Generally, the business interests may not be passive, or to the extent passive assets are held within the business, the passive assets’ value will count against the value of the interests required to reach the 35% threshold. The election also has rules for holding companies and currently excludes multitiered partnerships generally. 

If the estate qualifies for the Section 6166 election, the estate tax related to the closely held business may be deferred for up to five years from the original due date of the estate tax return and then make payments for up to 10 years. While some IRC Section 303 redemptions will not be an issue, generally a disposition or withdrawal of assets representing more than 50% of the business interest during the tax deferral or payment period may work to accelerate all related payments due (IRC Section 6166(g)).

If an IRC Section 6166 election is unavailable, there may be an option to request a deferral pursuant to IRC Section 6161. These requests are not limited to estates with qualifying business assets, but the estate needs to show reasonable cause (illiquid estate, financial loss to estate, pending litigation or disputes, lack of control of assets) and the decision whether to grant the deferral is at the IRS’s discretion. This deferral is generally granted in one-year increments and may not exceed 10 years.

If the estate tax is repealed, there would no longer be liquidity concerns regarding the need to pay the estate tax within nine months after death. Estate planners should consider whether a family would still need life insurance policies, typically owned in irrevocable life insurance trusts. Life insurance may remain appropriate to assist with the purchase of a deceased co-owner’s interest in the business or to assist the company upon the death of a key person in the business. Taxpayers may also wish to maintain the life insurance because it provides comfort to the family to know that, regardless of changes to the estate tax, the life insurance proceeds would be available, upon the death of the insured, to benefit the family, often in a creditor-protected life insurance trust. 

Estate planners should also review the terms of buy-sell agreements to verify that some of their provisions remain necessary in light of the potential disappearance of concerns over possible acceleration of the deferred estate tax payments under IRC Section 6166.  

State Estate & Inheritance Taxes

In addition to the federal estate tax, more than a dozen states impose an estate or inheritance tax and one state assesses a gift tax. Currently, any state estate or inheritance tax paid is deducted against federal estate tax (Treas. Reg. Section 20.2053-9). The difference between estate and inheritance taxes is that an estate tax is a tax on the estate itself, to be paid by the estate, and an inheritance tax is a tax payable by the person receiving the assets. According to the Tax Foundation, 12 states and the District of Columbia impose an estate tax, with rates up to 20% in Washington and Hawaii. There are six states with an inheritance tax with rates that usually depend on the relationship between the decedent and the beneficiary. Only Connecticut’s state estate tax exemption is tied to the federal amount, but the state also imposes its own gift tax. All other state estate tax exemptions are much lower than the federal exemption, starting from $1 million in Oregon to $6.94 million in New York. 

Many states provide planning opportunities through lifetime gifting. Some of these states have a lookback period from the date of death and the date of gift, which makes planning even more difficult because estate planners must weigh reducing the state estate tax versus retaining the asset in the decedent’s estate to receive a potential basis step-up.

Estate planners must also consider the possibility that additional states may decide to impose an estate tax if the federal government abandons this method of raising revenue. As always, estate planners must stay vigilant and keep abreast of state and local changes, as well as federal developments. Estate planners must be attentive to a client’s tangible property and real estate holdings in all states – not just the state of residence -- and around the world. 

IRS Guidance

Many of the described issues create uncertainty that will have advisors looking for guidance from the IRS. Such guidance has historically been slow coming and with the decreased funding to the IRS, it will likely cause further delays.