Estate tax exemption of $15M per person in "One Big Beautiful Act" bill

[SecondCor521]

The estate exemption is $13.99M this year and would have gone up 2.5-3% with inflation to $14.2-14.3M, so the OBBB increased it an underwhelming 4.5% more than inflation.

This is inaccurate.

The estate exemption would have gone up by inflation but then also would have been divided by 2 in 2026, so it would have been around $7.3M. This divide by 2 was part of the original TCJA from 2017.

The OBBBA eliminated the "divide by 2" sunset clause and increased the exemption amount, so it more than doubled the exemption compared to what it would have been had Congress not acted.

 

[Exchme]

This is inaccurate.

The estate exemption would have gone up by inflation but then also would have been divided by 2 in 2026, so it would have been around $7.3M. This divide by 2 was part of the original TCJA from 2017.

The OBBBA eliminated the "divide by 2" sunset clause and increased the exemption amount, so it more than doubled the exemption compared to what it would have been had Congress not acted.

You're right. Like the most of the bill, I have a hard time thinking of it as a change when it continues the current situation. I'll have to work on my Washington-speak.

 

[MichaelB]

Estate tax collected in fiscal year 2024 was around $26B. YTD current fiscal year (which ends 09/30) is $18.5B.

 

[Mark1]

Estate tax collected in fiscal year 2024 was around $26B. YTD current fiscal year (which ends 09/30) is $18.5B.

Interesting. Does your source give a number for the individuals this is divided by to get a $/estate?

 

[MichaelB]

Interesting. Does your source give a number for the individuals this is divided by to get a $/estate?

I use the Daily Treasury Statement (here). It shows income and outlays by category for the day, month to day and year to date. Great for data nerds.

 

[audreyh1]

Estate tax collected in fiscal year 2024 was around $26B. YTD current fiscal year (which ends 09/30) is $18.5B.

Compared to $6.8T 2024 govt spending?

 

[GrayHare]

The heir receive assets with stepped up basis. I didn’t think this applied to the estate itself.

The step up in cost basis happens at death not upon distribution to beneficiaries. So, for example, if an estate is worth $1 million at death, its executor can immediately sell all its assets and soon distribute the resulting $1 million cash to the beneficiaries without any entity incurring capital gains tax.

 

[MichaelB]

Compared to $6.8T 2024 govt spending?

I agree, not such a big deal. I would do away entirely with the estate tax, along with the stepped up basis.

 

[marko]

I agree, not such a big deal. I would do away entirely with the estate tax, along with the stepped up basis.

Not such a big deal...could be it because so many wealthy avoid the tax altogether?

But if we eliminate the estate and stepped up, what would the estate lawyers do all day?

 

[MichaelB]

<mod note> This is not the thread to discuss the overall US debt.

Note - multiple posts have been removed. Please stick to the thread topic.

 

[TheHobbit]

You're also right that in past decades, top income tax rates were much higher (up to 91% in the 1950s), and capital gains were taxed more heavily.

The very high tax rates after World War II were largely a response to the massive war-related debt the U.S. had accumulated.

It is an unfortunate misunderstanding that tax rates were significantly higher in the 50s and earlier. Yes the (marginal) brackets were higher, but the litany of tax carve outs and loopholes made the effective tax rates actually not much higher than today. If you also include state income tax rates, property taxes and sales taxes, they probably paid lower than what we do today.

Nobody — but nobody, was paying 91%.

More info: Taxes on the Rich Were Not That Much Higher in the 1950s

 

[audreyh1]

The step up in cost basis happens at death not upon distribution to beneficiaries. So, for example, if an estate is worth $1 million at death, its executor can immediately sell all its assets and soon distribute the resulting $1 million cash to the beneficiaries without any entity incurring capital gains tax.

Oh right, I knew that, I did just that as executor a few years ago. I sold the property, distributed the proceeds and the recipients got to use the stepped up basis.

 

[Koolau]

You're right. Like the most of the bill, I have a hard time thinking of it as a change when it continues the current situation. I'll have to work on my Washington-speak.

Like "cut" only means the second derivative of the growth is negative - not that anything is actually reduced but the growth rate. You need a score card for the OBBB. I hope we have it soon for planning purposes.

 

[SecondCor521]

Like "cut" only means the second derivative of the growth is negative - not that anything is actually reduced but the growth rate. You need a score card for the OBBB. I hope we have it soon for planning purposes.

The CBO scores all major bills, including this one. See Excel spreadsheet at:

Estimated Budgetary Effects of an Amendment in the Nature of a Substitute to H.R. 1, the One Big Beautiful Bill Act, Relative to the Budget Enforcement Baseline for Consideration in the Senate

As posted on the website of the Senate Committee on the Budget on June 27, 2025

www.cbo.gov

There were slight amendments from the above in the final bill, as noted at:

Information Concerning the Budgetary Effects of H.R. 1, as Passed by the Senate on July 1, 2025

As passed by the Senate on July 1, 2025

www.cbo.gov

The CBO is non-partisan.

 

[RetMD21]

See post #9.

IANAL, but obviously the goal is to mitigate the amount over the exclusion. You're not making the $30M estate moot because there IS no $30M estate...its more like $10M by the time it is tax-time. (All this before this week's changes but the principle applies)

A different twist on the idea of "Die With Zero", I suppose.

I'd expect that this planning is done over decades and would include irrevocable trusts, GSTs (if those ancient things are still around), FLPs, gifting, charitable trusts, formation of foundations and LLCs, among just a few. Very often a lot of that NW includes a business so there's additional options involved.

I'd also imagine that a lot of this is third or fourth generation money so a lot of those strategies are almost second nature.

One of the reasons that estate lawyers have the nicest boats in the marina.

There are a lot of limitations and costs to all of those strategies. The attorney's fees are part of it but you can also end up with increased income tax to avoid estate tax

 

[marko]

There are a lot of limitations and costs to all of those strategies. The attorney's fees are part of it but you can also end up with increased income tax to avoid estate tax

With $30MM I would expect that attorney's fees are the least of their concerns. But please explain how an increase in income tax would take place. I don't see how you're responsible for income attached to assets you no longer legally own. Some trusts are designed to have minimal income.

As noted, these are thoughtful approaches and strategies that are developed and put in place over decades. I doubt someone suddenly wakes up finding a huge NW and tries to remedy the tax implications over a few weeks or months.

 

[Stormy Kromer]

I live in a state with an estate tax and the limit is about $3,000,000.

There is no small reason that a lot of people are moving out of here to states like Florida, Texas and believe it or not South Dakota. South Dakota has seen a lot of wealthy people move there, I know a lot of them. They flew there in their private jets. No more state income tax or state inheritance taxes. Our former governor is one of them. He doesn't live there but his family's money does.

Back to the federal estate tax limit, I remember when it was $600,000. It doesn't seem that long ago. Not to be political, but it has increased over the years with both parties being in power. I think the comment above about a lot of members in congress being wealthy and that is why this limits gets preferential treatment is accurate. Lots of family wealth there in the capital.

 

[Route246]

Out of curiosity, from whom do they borrow? I'm assuming due to the large $'s talked about here (Zuck/Musk) they get very favorable rates and somehow pay back lower than they can earn? Somehow, even when you die, it has to be paid off.

I guess I am just not savvy enough to (quickly) understand this one.

Flieger

Understand that these are wealthy people who get very favorable interest rates from banks or other institutions that are far below consumer-grade rates. Let's say Zuck puts $100 million META in an account with cost basis near zero. He borrows $10 million at 1% interest, tax free as it is a loan and pays for his groceries and children's tuition. Every year he borrows more but hopefully this asset is appreciating faster than he can borrow. If it doesn't he just adds more shares of META and borrows against that. Remember, he still holds the META stock and a bank is providing the loan and the loan is collateralized with META or other appreciating asset. The bank is happy, META shareholders are happy because this is non-dilutive and held shares, the estate is happy when Zuck dies because the basis is stepped up when he dies for the remaining asset value of the shares. His groceries and kids' tuition got paid with borrowed money that was tax free because it was a loan.

The assumptions are that you are very wealthy with a lot of assets, that this is a very small percentage of those assets and that the assets are appreciating (i.e. safe from the bank's perspective). The loans are noise but they pay living expenses tax free at the same time.

 

[SecondCor521]

I understand the borrow - spend - die paradigm.

I'm not sure I buy that it's as good as it sounds and that it actually happens to the degree implied by the media.

I have two comments:

1. I'm sure banks give those folks the best rates they can in order to curry favor and potentially get future business. But I'm not sure if they would actually do a collateralized loan at 1% when they could borrow risk free from the US Treasury at, say 4.25% or so (2 year Treasury today).

2. These folks do have to pay interest on these loans and either make payments or roll them over into new loans. I think there are two cases to consider:

(a) these folks do it with a very small percentage of their net worth. If so, it seems like they wouldn't even bother with the hassle for the tax savings. But maybe they do. $10M on $250B in the Zuckerberg example is 0.004 percent, and that's the annual spending, not even the tax savings which would be a percentage of that miniscule fraction.

(b) these folks do it with a largish percentage of their net worth. Now it's worth it for the tax savings, but if they're young-ish, then they might become overleveraged at some point, especially if the value of their company falters. Say they spend 4% of their net worth every year for five years, thus building up a 20% debt load (plus some for the interest). Their stock drops by 40%, and now their debt ratio is over 33%. The bank gets nervous, calls the loan, the folk involved sell at a loss...? Bleh.

As an example, Apple stock dropped about 30% between it's February high and April low. And the CNBC talking heads usually talk about Apple as a "safe haven" tech company. Meta dropped by about 35% over a similar time frame.

 

[aja8888]

But if we eliminate the estate and stepped up, what would the estate lawyers do all day?

Probably switch to Family Law and handle all the law suits and divorce cases.

 

[camfused]

Understand that these are wealthy people who get very favorable interest rates from banks or other institutions that are far below consumer-grade rates. Let's say Zuck puts $100 million META in an account with cost basis near zero. He borrows $10 million at 1% interest, tax free as it is a loan and pays for his groceries and children's tuition. Every year he borrows more but hopefully this asset is appreciating faster than he can borrow. If it doesn't he just adds more shares of META and borrows against that. Remember, he still holds the META stock and a bank is providing the loan and the loan is collateralized with META or other appreciating asset. The bank is happy, META shareholders are happy because this is non-dilutive and held shares, the estate is happy when Zuck dies because the basis is stepped up when he dies for the remaining asset value of the shares. His groceries and kids' tuition got paid with borrowed money that was tax free because it was a loan.

The assumptions are that you are very wealthy with a lot of assets, that this is a very small percentage of those assets and that the assets are appreciating (i.e. safe from the bank's perspective). The loans are noise but they pay living expenses tax free at the same time.

The mental picture of Zuck pushing a cart around at his local Krogers, looking for a bogo on toilet paper, made me chuckle.