Republicans’ proposed legislation to repeal the federal estate and generation-skipping transfer (GST) taxes may create additional complexities for estates that use formula clauses and those that involve multigenerational wealth planning.
Current law provides a $13.99 million exemption on the transfer of assets that may be used for lifetime gifting and/or transfers at death through a taxpayer’s estate. In addition, the current tax rules provide 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. The exemption amount is $27.98 million per couple.i The estate, gift, and GST taxes are all imposed at a flat 40% rate on amounts above the exemption, assessed depending on the time of the transfer and the receiving beneficiary.
Given the interplay between the exemption amounts and taxpayers’ goal to reduce taxes, many estate planning documents for married couples include formula clauses that state that any remaining estate and GST exemption amounts will pass to a family or bypass trust, with any amounts above that going to a surviving spouse or a marital trust. Similar formula clauses may also be used when making charitable bequests. These funding formulas are useful in taking advantage of the unlimited deductions provided for bequests to spouses or charity.
Unintended consequences may arise when estate plans contain formula clauses if the estate tax and GST taxes are repealed. In that event, the formula would likely cause the entire estate to pass to the family trust, a result that may be inconsistent with the decedent’s intent to leave some assets to the spouse (marital trust) or charity. The family trust receiving all the estate’s assets may not provide any benefit to the surviving spouse. If the taxpayer’s use of the formula clause does not provide the intended resources to beneficiaries, the parties may resort to litigation so the courts can determine intent and equity, potentially creating issues in community property states or reverting to state spousal elective share claims.
Estate planners should consider revising clients’ estate plans to include dispositive provisions in case the estate and GST taxes are repealed. Estate plan redrafting should also contemplate the possibility that a future administration could reinstate the estate and GST taxes.
The Death Tax Repeal Act proposed on February 13, 2025ii 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 step-up in basis for assets owned by the decedent at death. By contrast, the proposed 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. Many states impose their own individual income tax that, when combined with the federal income tax, creates almost an equal amount of benefit from the step-up as the estate tax repeal, although the benefit is usually deferred until assets are sold. Due to the limited number of estates that are subject to estate tax, most estate planning has shifted to basis planning to reduce the amount of income tax payable by beneficiaries when assets are later sold.
With a basis step-up, already depreciated assets may actually be re-depreciated by the beneficiary if the assets are used in the scope of a business. For entities taxed as partnerships, not only is there a basis step-up for the value of the entity interest owned by the taxpayer at death, but also the possibility of a basis step-up for the pro rata ownership amount of underlying entity assets if an IRC Section 754 election is made.
Repealing the GST tax would also create uncertainty for families with large amounts of wealth likely to last for multiple generations. As discussed, each taxpayer has a $13.99 million GST exemption that they may allocate to gifts or to transfers at death. Often, taxpayers will use this exemption to fund trusts created in states that have essentially abolished limitations on trust duration and that provide extensive creditor protections for trust assets. Assets retained in GST-exempt trusts are generally exempt from additional levels of estate, gift, and GST tax for the entire trust duration. If the GST tax is removed from the Internal Revenue Code, there will no longer be a mechanism to allocate GST exemption to transfers to long-term trusts. If the legislation moves forward and the GST is repealed, taxpayers who already have contributed to GST-exempt trusts wish to make additional transfers to a trust, it may be prudent to set up new trusts so as not to commingle pre- and post-repeal assets, given concerns that the GST tax might be reintroduced to the tax code without a grandfather provision.
The proposed legislation retains the gift tax. Presumably, the gift tax would act as a backstop to prevent the shifting of assets and income among family members. Under the act, taxpayers would continue to be limited to the inflation-adjusted gift tax exemption for transfers during life ($13.99 million for 2025), and a 35% gift tax would be due on transfers in excess of the exemption amount. Under current law, gifting is tax advantageous for large estates because the value of the gift – and the amount of exemption used – is determined on the date the gift is made. For high-growth assets, the savings expected from estate tax may 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 will be harder to model between the proposed 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 assets, would be important factors in those analyses.
Any changes to the estate and GST tax would require guidance from the IRS for practitioners, which may be slow coming. Overall, repealing the estate and GST taxes may result in more complicated estate planning and the need to update estate plans more frequently to help verify that taxpayer intent is effectuated.
This article was originally published by Bloomberg Tax*. Reproduced with permission. Copyright 2025 Bloomberg Industry Group, Inc. (800-372-1033) www.bloombergindustry.com.
i IRC sections 2001; 2601.
ii https://www.congress.gov/bill/118th-congress/senate-bill/1108