The Federal Estate Tax and the Big Beautiful Bill
It is tempting to think that the budget conflicts in Washington today are something new and different from an ongoing dialogue going on for at least twenty-five years and more. The most recent major discussion concerns the federal Tax Cuts and Jobs Act, passed in 2017 during the first Trump administration. The TCJA contained a trigger that brings us to today and asks the question whether it is worth it to continue the march to more and eventually larger federal estate tax reductions while cutting services or alternatively to keep the benefits that average Americans have come to expect especially but not limited to healthcare.
The TCJA significantly reduced federal taxes on corporations, which reductions are expected to continue. It also changed many individual taxes in some cases changing the rate while eliminating certain deductions.
Notably, the law almost doubled the figure for exemption from federal estate taxes from $5,490,000 as adjusted for inflation to $11,180,000 as adjusted for inflation. However, under TCJA the sizeable reductions regarding individual estates under the federal estate tax were set to expire on January 1, 2026 – one might call it the “Cinderella” hour – when individual Americans would return to the $5,490,000 exemption of 2017 adjusted by inflation instead of the $11,180,000 exemption adjusted by inflation that we have today. At the stroke of midnight January 1, 2026 the increased exemption would revert to the prior figure. This might seem unfair to those experiencing the current extremely high exemption amounts but the results for other programs, especially medical, including but not limited to Medicaid, and to government services could be catastrophic.
The current exemption from federal estate taxes for individuals which is $13,990,000 for individual taxpayers dying in 2025 would revert to $5,490,000 as adjusted by inflation – thus the “Cinderella” hour. The extreme distress in Congress comes primarily from the attempts to keep the individual exemption adjusting it even higher for inflation over the years and apparently to keep it indefinitely if not more so.
But this is not the end of the discussion. The $13,990,000 described is for individual taxpayers. Often ignored in discussion is the unlimited marital deduction from federal estate taxes. Where a spouse dies and an American citizen surviving spouse inherits there is no federal estate tax assessed regardless of the amount of the inheritance. There is an unlimited marital deduction. Planning for the next generation is the real discussion and this is what actually takes shape while anticipating the death of the second spouse. Here is where annual lifetime exclusionary gifting which many have heard of, for instance, and disclaimer trusts or spousal elective share trusts and other structures come into play. Documents are drafted during the lifetime of both spouses to protect further and additional generations from federal estate taxes. Later, also, after the death of the first spouse, the surviving spouse can file although not strictly speaking required to file an estate tax return which is not necessary for his/her own tax purposes but for portability of the excess deduction to carry into the next generation where the total individual exclusion has not been used on the death of the first spouse.
While the debate over federal estate tax deductions which is primarily targeted to the next generation of inheritors continues, in the meantime there is the issue of other goods and services that the federal government provides including but not limited to healthcare. Other considerations for instance are national parks, other tax credits and deductions, and healthcare. Also, possible Medicare and Social Security implications.
Under the Affordable Care Act (Obamacare), Americans have become accustomed to many of its healthcare provisions since its passage in 2010. People whose income is low enough not to afford conventional healthcare insurance and who do not otherwise qualify for Medicaid, people who do not have health insurance coverage though employment and others in need of specialized coverage have been able to receive healthcare especially in the 40 states and Washington, DC that have adopted Medicaid expansion. Some of those states have provisions in state law indicating that if federal participation drops they will also drop Medicaid expansion. There is also “Marketplace” known in Pennsylvania as “Pennie.”
Other programs that could be affected by budget cuts include but are not limited to those that provide assistance to hospitals especially for patients unable to pay, not just rural hospitals, and staffing for offices such as Social Security and IRS.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.