Recent Changes in the Estate and Gift Tax
Provisions
Updated October 19, 2021
Congressional Research Service
https://crsreports.congress.gov
R42959
Recent Changes in the Estate and Gift Tax Provisions
Summary
The American Taxpayer Relief Act (ATRA; P.L. 112-240) established permanent rules for the
estate and gift tax for 2013 going forward. The tax revision of 2017 (P.L. 115-97) doubled the
exemption levels. This increase expires after 2025.
The estate tax is imposed on bequests at death as wel as inter-vivos (during life) gifts. A certain
amount of each estate, $5 mil ion in 2011, indexed for inflation, is exempted from taxation by the
federal government. With indexation, the value was $5.49 mil ion in 2017 and with the temporary
doubling of the exemption and inflation adjustments, is $11.7 mil ion in 2021. The taxable estate
is taxed at 40%. The exemption applies to total bequests and gifts (separate from the annual inter-
vivos gift exemption of $15,000 per donee for 2021). Transfers between spouses are exempted,
and any unused exemption can be inherited by a surviving spouse. Other elements of the tax
remain, including deductions for charitable bequests and a number of special provisions for farms
and smal businesses.
The permanent tax treatment of estates and gifts had been uncertain for some time. The Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16), among other tax
cuts, provided for a gradual reduction and elimination of the estate tax. Under EGTRRA, the
estate tax exemption rose from $675,000 in 2001 to $3.5 mil ion in 2009, and the rate fel from
55% to 45%. In 2010, the estate tax was eliminated. There was general agreement that some sort
of estate tax would be retained. A proposal to make the 2009 rules ($3.5 mil ion exemption and
45% rate) permanent was included in President Obama’s 2010 and 2011 budget outlines and was
passed by the House in December 2009. In addition, in 2009, Senate Democratic leaders
supported the plan to enact the 2009 rules permanently. The Senate Republican leadership
proposed a $5 mil ion exemption and 35% rate. This latter provision was eventual y adopted for a
two-year period, through 2012. For estates of decedents in 2010, either the 2010 or the 2011 rules
could have been elected. Spouses can inherit unused exemptions. The permanent provisions retain
most of the rules adopted for 2011 and 2012, but with a higher rate.
Compared with the $1 mil ion exemption and 55% rate under pre-EGTRRA law, the 2013
permanent rules were estimated to lose an average of about $37 bil ion over the next 10 years, a
two-thirds reduction in estate tax revenues. The increase in the exemption level costs around $10
bil ion per year, a further reduction of about 40% of projected revenues.
Regardless of the exemption levels considered, few estates are affected by the tax. The estate tax
is a highly progressive tax, with about three-fourths collected from estates in which decedents are
in the top 1% of the income distribution. At a $5 million exemption, less than 0.2% of estates wil
be subject to the tax, and at the higher temporary levels, less than 0.1% of estates wil be subject
to the tax. Although concerns have been raised about the effects of the tax on smal businesses
and farmers, estimates indicate that only a smal share of these decedents are affected.
Budget proposals during the Obama Administration proposed a return to the 2009 rates and
exemptions. They also proposed a variety of structural reforms, including restricting Grantor
Retained Annuity Trusts (GRATs), providing consistent valuation for estate tax and basis for
capital gains, limiting the duration of generation-skipping trusts, and providing consistent
treatment of grantor trusts along with some other minor changes. Prior provisions would have
disal owed minority discounts (for estates left to a family partnership) and addressed other
aspects of GRATs. During the recent 2017 tax reform deliberations, the House proposed to
increase the higher exemption temporarily and repeal the estate tax after 2024. The Biden
Administration has proposed to tax capital gains when transferred by gift or at death. Currently,
these gains escape capital gains taxes. The Build Back Better Act (BBBA; H.R. 5376), the House
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Recent Changes in the Estate and Gift Tax Provisions
proposal currently considered as part of reconciliation, would return the exemption levels to $5
mil ion indexed for inflation (which would be approximately $5.9 mil ion in 2021), al ow
increased limits on special provisions for farmers and smal businesses, and make other changes
limiting certain discounts or affecting the treatment of grantor trusts.
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Contents
Introduction ................................................................................................................... 1
Basic Structure ............................................................................................................... 1
Rates and Basic Exemptions........................................................................................ 1
Other Exemptions and Deductions ............................................................................... 2
Special Provisions for Smal Businesses, Farms, and Landowners ..................................... 2
Step-up in Basis for Appreciated Assets ........................................................................ 3
Differences in the Treatment of Bequests and Gifts ......................................................... 3
Brief History of Recent Developments ............................................................................... 3
Revenues and Coverage ................................................................................................... 4
Issues and Options .......................................................................................................... 6
Making the Higher Exemption Levels Permanent ........................................................... 7
Proposal to Repeal the Estate Tax and Reduce the Gift Tax Rate to 35% ............................ 7
Proposal to Return to 2009 Rates and Exemptions .......................................................... 7
Proposal to Return to the 2017 Exemption Level ............................................................ 8
Proposal to Tax Capital Gains at Death or by Gift ........................................................... 8
Narrow Provisions ..................................................................................................... 8
Increase the Valuation Limits for Discounts for Businesses and Farms Based on
Use.................................................................................................................. 8
Grantor Trusts Income and Transfer Tax Rules .......................................................... 8
Grantor Retained Annuity Trusts............................................................................. 9
Minority Discounts ............................................................................................. 10
Consistent Valuation ........................................................................................... 10
Other Minor Provisions ....................................................................................... 10
Simplify Gift Tax Exclusion for Annual Gifts ......................................................... 10
Contacts
Author Information ....................................................................................................... 11
Congressional Research Service
Recent Changes in the Estate and Gift Tax Provisions
Introduction
The estate and gift tax is imposed on bequests at death and on inter-vivos (during lifetime) gifts.
The rate of the tax and the level of exemption have been under discussion for some time, with
temporary provisions in place for a number of years. The American Taxpayer Relief Act of 2012
(P.L. 112-240) established permanent rules for the estate and gift tax for 2013 going forward.
Although details of the tax structure are addressed in the following section, the principal rules are
as follows:1
In 2011, estates and lifetime gifts had a combined exemption of $5 mil ion in
asset value, indexed for inflation. This exemption was made permanent and was
$5.49 mil ion for 2017.
The estate tax rate on the taxable portion of the estate, if any, is 40%.
The exemption from the estate tax applies to estates and lifetime inter-vivos gifts
in the aggregate. The separate annual exemption per donee for inter-vivos gifts is
retained; it is also indexed in $1,000 increments and has increased from $13,000
in 2012 to $14,000 in 2017 and $15,000 in 2018.
Transfers to spouses remain exempt, but spouses can inherit any unused portion
of the exemption from each other, so that the combined exemption for a couple
was $10 mil ion in 2011. Other estate tax deductions, such as those for charitable
contributions, are retained.
A number of special rules for farms and smal businesses are retained.
A doubling of the exemption level was adopted in the 2017 tax revision (P.L.
115-97), effective from 2018 to 2025; for 2021, the exemption is $11.7 mil ion.
This report describes the basic structure of the estate and gift tax, provides a brief history of
recent developments, discusses the revenue effects and distribution of the tax, and briefly
discusses issues and options.
Basic Structure
The estate and gift tax is a unified tax, so that assets transferred as gifts during a person’s lifetime
are combined with those transferred at death (bequests) and subject to a single rate schedule.2 The
tax is imposed on the decedent’s estate and the rate structure applies to total bequests and gifts
given; heirs are not subject to tax.
Rates and Basic Exemptions
The exemption for 2017 is $5.49 mil ion, and it is indexed for inflation. From 2018 to 2025, the
exemption is doubled, and it is $11.7 mil ion for 2021. Although the rates of the tax are
graduated, the exemption is applied in the form of a credit and offsets taxes applied at the lower
1 See Estate T ax, at http://www.irs.gov/Businesses/Small-Businesses-&- Self-Employed/Estate-T ax, and Frequently
Asked Questions on the Gift T ax, at http://www.irs.gov/Businesses/Small-Businesses-&-Se lf-Employed/Frequently-
Asked-Questions-on-Gift-T axes#5.
2 CRS Report 95-416, The Federal Estate, Gift, and Generation-Skipping Transfer Taxes, by Emily M. Lanza, provides
a detailed description of the estate tax (report out of print; available to congressional clients from the author upon
request).
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rates. Thus the taxable estate is therefore subject to a flat 40% rate. This rate is higher than the
35% rate that prevailed in 2011 and 2013, but lower than the 45% rate that applied in 2009.3
Individuals are also al owed to exempt annual gifts of $14,000 per recipient for 2017, which are
not counted as part of the lifetime exemption. The annual gift tax exemption is indexed for
inflation in $1,000 increments and wil rise to $15,000 in 2018 and remain at that level in 2021. A
generation-skipping tax is also imposed, to address estate tax avoidance through gifts and
bequests to a later generation.4
Other Exemptions and Deductions
Transfers between spouses are exempt. Estates are al owed to take deductions for charitable
contributions and administrative expenses; a deduction for taxes paid on estates and inheritances
imposed by states; and to exempt up to $5.49 mil ion for 2017 ($11.7 mil ion in 2021) in
remaining assets from the tax.
A spouse can inherit any unused exemption. Thus, if a husband died and left an estate of $3
mil ion in 2017, the remainder of his $5.49 mil ion exemption can be used by his wife, whose
exemption would be increased by the $2.43 mil ion difference.
Special Provisions for Small Businesses, Farms, and Landowners
A series of provisions benefit smal businesses, including farms and landowners. These provisions
include the ability of family businesses to pay any estate tax due in instal ments with only the
interest payments during part of the instal ment period, special use valuations, and conservation
easements. Minority discounts, although granted by courts rather than specifical y in the law, may
also benefit smal businesses. Minority discounts are al owed when assets are left to a family
partnership in which no individual has a controlling share and are thus deemed to lose value for
that reason.
Although the estate tax return is due within nine months of the death, smal businesses are
al owed to defer payment (except for interest) for the next five years, and pay the remaining
instal ment payments over 10 years. Because the last interest payment and the first instal ment
coincide, the overal delay in full payment is 14 years. The benefit is al owed only for the
business portion of assets if 35% of the estate is in a farm or closely held business.
Smal businesses are also al owed to value their assets at use as a farm or business. This provision
is particularly beneficial to farms and al ows a reduction in the estate value of up to $1 mil ion,
adjusted for inflation ($1.19 mil ion in 2021). It means, for example, that the value of the farm
wil be what it could be sold for if restricted to farm use rather than to be subdivided for
development. Heirs are required to continue use of the assets as a farm or business for 10 years.
Farmers and other landowners may also benefit from conservation easements, a perpetual
restriction on the use of the land. In addition to the reduction in value due to the easement itself,
an exclusion of up to 40% of the restricted value of the land, capped at $500,000, is al owed.
3 A discussion of the debate over exemptions and rates as the 2001 tax cut provisions were expiring is in CRS Report
R41203, Estate Tax Options, by Jane G. Gravelle (report out of print; available to congressional clients from the author
upon request).
4 For example, parents may directly skip a generation by leaving some assets to grandchildren, or they may set up a
lifetime trust for their children, with the assets subsequently inherited by the grandchildren. T he generation -skipping
tax is imposed in these circumstances, although it also has an exemption.
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Recent Changes in the Estate and Gift Tax Provisions
Step-up in Basis for Appreciated Assets
Heirs take as their basis (the amount to be deducted from the sales price) for purposes of future
capital gains the value of the asset at the date of the decedent’s death. This treatment is referred to
as step-up in basis and means that no capital gains tax is paid on the appreciation of assets during
the decedent’s lifetime. For example, if a decedent purchased stock for $100,000 and the value of
the stock at the time of death were $200,000, if the heir sel s the property for $250,000 a gain of
$50,000 ($250,000 minus the stepped-up basis of $200,000) is recognized. The $100,000 of gain
that accrued during the decedent’s lifetime is never taxed. The step-up rules do not apply to gifts,
in which carryover basis is applied. In that case, the original basis of $100,000 would be carried
over and the gain would be $150,000 ($250,000 minus $100,000). Both the gain accrued by the
donor and the gain accrued by the donee are taxed.
Differences in the Treatment of Bequests and Gifts
Aside from the different exemption levels in some estate tax rules, there are other differences
between the taxation of gifts and bequests. As noted above, gifts do not benefit from the step-up
in basis. When the donee subsequently sel s an asset, the cost (referred to as basis) deducted from
the sales price is the original cost to the donor. For example, if a donor purchased stock for
$100,000 and the value of the stock at the time of the gift were $200,000, when the donee sel s
the property for $250,000 a gain of $150,000 ($250,000 minus the original basis of $100,000) is
recognized. The basis cannot be less than the fair market value at the time of the gift if a loss is
realized.
In addition, the gift tax is tax exclusive (i.e., the tax is imposed on the gift net of the tax), whereas
the estate tax is tax inclusive (i.e., the tax is applied to the estate inclusive of the tax). To
il ustrate, consider a 50% tax rate. Assuming the exemption is already used, to provide a gift of $1
mil ion costs $1.5 mil ion: the tax rate of 50% is applied to the gift of $1 mil ion for a $0.5
mil ion tax. To provide a net amount of $1 mil ion for a bequest, $2 mil ion is required: a tax of
$1 mil ion (50% of $2 mil ion) and a net to the heir of $1 mil ion. Another way of stating this is
that the gift tax rate, if stated as a tax inclusive rate like the estate tax, would be 33%. Thus for a
40% estate tax rate, the gift tax rate equivalent is 28.6%.5
Brief History of Recent Developments
The Economic Growth and Tax Relief Act of 2001 (EGTRRA; P.L. 107-16) provided for a
gradual reduction in the estate tax. A unified exemption for both lifetime gifts and the estate of
$675,000 applied at that time.
Under EGTRRA, the estate tax exemption rose from $675,000 in 2001 to $3.5 mil ion in 2009,
and the top tax rate fel from 55% to 45%. Although combined estate and gift tax rates are
graduated, the exemption is effectively in the form of a credit that eliminates tax due at lower
rates resulting in a flat rate on taxable assets under 2009 law. The gift tax exemption was,
however, restricted to $1 mil ion.
For 2010, EGTRRA scheduled the elimination of the estate tax, although it retained the gift tax
and its $1 mil ion exemption. EGTRRA also provided for a carryover of basis for assets inherited
at death, so that, in contrast with prior law, heirs who sold assets would have to pay tax on gains
5 T o convert the statutory tax inclusive rate into an equivalent rate for a tax exclusive application, the formula is t/(1+t),
where t is the tax inclusive rate.
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accrued during the decedent’s lifetime. This provision has a $1.3 mil ion exemption for gain (plus
$3 mil ion for a spouse).
As with other provisions of EGTRRA, the tax revisions were to expire in 2011, returning the tax
provisions to their pre-EGTRRA levels. The exemption would have reverted to $1 mil ion (a
value that had already been scheduled for pre-EGTRRA law) and the rate to 55% (with some
graduated rates). The carryover basis provision effective in 2010 would be eliminated (so that
heirs would not be taxed on gain accumulated during the decedent’s life when they inherit assets).
During debate on the estate tax, most agreed that the 2010 provisions would not be continued and,
indeed, could be repealed retroactively. President Obama proposed a permanent extension of the
2009 rules (a $3.5 mil ion exemption and a 45% tax rate), and the House provided for that
permanent extension on December 3, 2009 (H.R. 4154). The Senate Democratic leadership
indicated a plan to retroactively reinstate the 2009 rules for 2010 and beyond. Senate Minority
Leader McConnel proposed an alternative of a 35% tax rate and a $5 mil ion exemption.6 A
similar proposal for a $5 mil ion exemption and a 35% rate, which also included the ability of the
surviving spouse to inherit any unused exemption of the decedent, is often referred to as Lincoln-
Kyl (named after the two Senators who supported it). Proposals were also made to begin with the
$3.5 mil ion exemption and 45% rate and phase in the $5 mil ion exemption and 55% rate. Others
had argued for permanent estate tax repeal.7 At the end of 2010, a temporary two-year extension,
with a $5 mil ion exemption, a 35% rate, and inheritance of unused spousal exemptions was
enacted in P.L. 111-312. These provisions provided for estate tax rules through 2012, and absent
legislation, the provisions would have reverted to the pre-EGTRRA rules ($1 mil ion exemption,
55% top rate).
The American Taxpayer Relief Act of 2012 (P.L. 112-240) established the permanent exemption
($5.25 mil ion) and rate (40%) described above.
The 2017 tax revision (P.L. 115-97) doubled the exemptions for the years 2018 through 2025. The
House had proposed doubling the exemption through 2024 and then repealing the estate tax and
lowering the gift tax rates to 35%.
Revenues and Coverage
Compared with preexisting law (a $1 mil ion exemption and a 55% rate), the ATRA revision was
projected to lose $369 bil ion in revenue from FY2013 to FY2022, rising from $27 bil ion in
FY2015 to $54 bil ion FY2022.8 This change reduced total projected revenue from the estate tax
by about two-thirds.9 The 2017 revision was projected to reduce revenues by $83 bil ion over
eight years, for a further reduction in projected revenue of about 40%.
6 See Chuck O’T oole, “Estate T ax Expiration Imminent After Congress Fails to Complete Action,” Tax Notes Today,
December 17, 2009, 2009TNT 240-4. For a discussion indicating that there would not be a legal issue with a retroactive
tax, see Jay Starkman, “Can an Estate T ax be Retroactive?” Tax Notes, February 22, 2010, pp. 972-974.
7 In addition to H.R. 4154, numerous bills were introduced in the 111th Congress to address the estate tax. T he phase-in
proposal was described in Martin Vaughn, U.S. Effort to Reduce Estate T ax Hits T urbulence, Dow Jones Newswire,
May 18, 2010, at http://www.nasdaq.com/aspx/stock-market -news-story.aspx?storyid=
201005181832dowjonesdjonline000463&title=us-senate-effort-to-reduce-estate-tax-hits-turbulence.
8 Estimates of the Joint Committee on T axation, JCX-1-13, January 1, 2013, at https://www.jct.gov/publications.html?
func=startdown&id=4497.
9 Based on data reported in CRS Report R41203, Estate Tax Options, by Jane G. Gravelle (report out of print; available
to congressional clients from the author upon request), using data from the Urban Brookings T ax Policy Center, T able
T 09-0431, at http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2506&topic2ID=60&topic3ID=66&
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Recent Changes in the Estate and Gift Tax Provisions
Data from estate tax returns indicate that revenues fel from $19.9 bil ion in 2017 to $13.2 bil ion
in 2019.10
Only a smal portion of high-income decedents are affected by the tax under a $5 mil ion
exemption.
The estate tax would have affected less than 0.2% of decedents over the next
decade under the permanent rules. The doubling of the exemption would reduce
that share to 0.07%.11
The estate tax is concentrated among high-income taxpayers: 91% is paid by the
top quintile, 60.4% by the top 1%, and 26% by the top 0.1%. The concentration
in upper income categories would be increased with the higher temporary
exemption levels. For 2018, 93% is paid by the top 10%, 71% by the top 1%, and
39% by the top 0.1%.
About 0.2% of estates with half or more of their assets in businesses wil be
subject to the estate tax under the permanent rules, and less with the higher
exemption levels.
About 100 farm estates (or approximately two per state) are projected to be
subject to the estate tax, and constitute 1.8% of taxable estates according to a
projection from a CBO study. If the number of farm estates fal in proportion to
the number of estates in general, around 25 farm estates (one estate every two
years per state) would be taxable with the higher exemption level enacted in
2017. Less than a quarter of taxable farm estates (0.4% of al farm estates) are
projected to have inadequate liquidity to pay estate taxes. The Department of
Agriculture, using a somewhat different measure of what constitutes a farm,
projects less than 1% (0.4%) of farm operator estates is projected to pay the tax,
totaling 153 estates. These shares would also be expected to decline significantly
with the higher exemptions.
DocT ypeID=.
10 Internal Revenue Service, Statistics of Income, Estate T ax Filing Year T ables, https://www.irs.gov/statistics/soi-tax-
stats-estate-tax-filing-year-tables.
11 T he 0.2% share is based on 2.7 million deaths in 2017 and estimates that 5,460 estates are projected to pay the estate
tax in 2017 according to estimates by the T ax Policy Center, T able T 17-0230, at https://www.taxpolicycenter.org/
model-estimates/baseline-estate-tax-tables-2017/t17-0230-current-law-distribution-gross-estate-and. T he share for 2020
is from T ax Policy Center, Briefing Book, p. 2, https://www.taxpolicycenter.org/briefing-book/who-pays-estate-tax.
T he distribution by income class is based on the T ax Policy Center, T able T 17 -0056, at
http://www.taxpolicycenter.org/model-estimates/baseline-share-federal-taxes-march-2017/t17-0056-share-federal-
taxes-all-tax-units. T he distribution for 2018 (with the doubling of exemptions) is from the T ax Policy Center, Briefing
Book, p. 3, https://www.taxpolicycenter.org/briefing-book/who-pays-estate-tax. Some of these estimates are reported in
CRS Report R41203, Estate Tax Options, by Jane G. Gravelle (report out of print; available to congressional clients
from the author upon request ). Sources include data from Urban Brookings T ax Policy Center, T ables T 10 -0073 and
T 09-0402, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2664&topic2ID=60&topic3ID=66&
DocT ypeID=; T able T 10-0269, http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=2868&DocTypeID=
7; T ables T 09-0196, T09-0198, and T 09-0199, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=
2270&topic2ID=60&topic3ID=66&DocTypeID=; T able T 09-0431, http://www.taxpolicycenter.org/numbers/
displayatab.cfm?DocID=2506&topic2ID=60&topic3ID=66&DocTypeID=. T able T 09-0426,
http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2501&topic2ID=60&topic3ID=73&DocTypeID=
Congressional Budget Office, Effects of the Federal Estate Tax on Farm s and Sm all Businesses, July 2005,
http://www.cbo.gov/ftpdocs/65xx/doc6512/07-06-EstateTax.pdf. T he number of farms is based on 1.8% applied to the
taxable estates projected for 2016 reflecting data from the CBO study.
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About 94 estates (about two per state) with half their assets in smal business and
that expect their heirs to continue in the business are projected to be subject to
the estate tax; they constitute 2.5% of total estates.12 Less than a half (1.1%) is
projected to have inadequate liquidity to pay estate taxes.13 These amounts would
also decline significantly with the higher exemption level.
Issues and Options
A number of general issues have been raised about the estate tax. For example, some have
expressed concern that the estate tax discourages savings. Others have noted that the tax
encourages charitable bequests because they are deductible and reducing rates and increasing the
exemption wil reduce charitable contributions. A broader estate tax is also c riticized as causing
complex planning and tax administration problems.14
Although the current size of the exemption and the rate of tax had been set in permanent tax law,
the House and Senate tax reform proposals differed in their approaches in 2017. Although both
proposed an immediate doubling of the exemption level, the House would have repealed the
estate tax (and reduced the gift tax rate to 35%) after 2024. The final bil doubled the exemption
level but, as with other individual provisions, the increase is set to expire after 2025. As a result,
the exemption level wil return to its permanent level in 2026, absent further legislative change to
extend the increase or make the increase permanent. The Obama Administration had previously
proposed to return to the 2009 rates and levels. President Obama’s budgets also contained some
more narrow proposals aimed at perceived abuses of the estate tax. Al of the estimates of revenue
gain for President Obama’s budget, unless otherwise noted, are for FY2016-FY2025 and are
obtained from the FY2016 budget proposals.15 Note that these estimates of narrow provisions are
based on the assumption of lower exemptions and higher rates in the 2016 budget.
The Build Back Better Act (BBBA; H.R. 5376, 117th Congress), currently considered as part of
reconciliation, also contains several changes including restoring the lower exemption. It also
makes narrower changes including increasing the limits on discounts for valuation of farms and
businesses based on use, coordinating the income and estate tax treatment of grantor trusts, and
disal owing minority discounts for cash and readily marketable assets. The revenue estimates for
these proposals are al for FY2022-FY2031 and are obtained from estimates of the Joint
Committee on Taxation.16
12 T hese estates were identified by their use of the qualified family owned business income (QFOBI). In prior law, this
provision allowed estates with at least half of their assets in a family business to take a deduction for these business
assets. T his provision originally allowed up to $675,000 of business deductions at a time when the basic estate tax
exemption was $625,000, and imposed an overall cap of $1.3 million on the total of both deductions. T o qualify for the
QFOBI deduction, heirs had to continue the business for 10 years or the tax savings must be repaid. Once the regular
exemption passed the $1.3 million level, the provisio n was no longer relevant. Although QFOBI is obsolete, it was used
in prior statistical studies to identify small business estates whose continuance might be made more difficult due to an
estate tax.
13 Data on the 0.8% of farms that pay the tax are from the U.S. Department of Agriculture, https://www.ers.usda.gov/
topics/farm-economy/federal-tax-issues/federal-estate-taxes.aspx.
14 T hese issues are discussed in more detail in CRS Report R41203, Estate Tax Options, by Jane G. Gravelle (report out
of print; available to congressional clients from the author upon request).
15 Department of the Treasury, General Explanations of the Administrations Fiscal Year 2016 Revenue Proposals,
February 2015, at http://www.treasury.gov/resource-center/tax-policy/Pages/general_explanation.aspx. Past budget
proposals can be found there as well.
16 Joint Committee on T axation, “Estimated Budgetary Effects Of An Amendment In T he Nature Of A Substitute T o
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Another issue of concern is with the step-up in basis, which discourages realizations of capital
gains taxes and is the major reason that there are limits to raising revenue by increasing capital
gains tax rates, because these increases wil lead to holding more assets until death to avoid the
tax. One study estimated that capital gains represented 13% of the assets of estates under $2
mil ion (the smal est estates) and 55% of the assets of estates over $100 mil ion.17
Making the Higher Exemption Levels Permanent
The 2017 increase in exemption level was estimated to lose $83 bil ion in revenue.18 Making it
permanent would appear to have increased the cost by about $12 bil ion; it would also eventual y
be larger, not just due to growth in wealth, but to lags in filing estate tax returns.
Proposal to Repeal the Estate Tax and Reduce the Gift Tax Rate to
35%
The House version of H.R. 1 in the 115th Congress (which, after changes, became the Tax Cuts
and Jobs Act, P.L. 115-97) would have first increased the exemption levels and repealed the estate
tax after 2023. The revenue estimate indicates a cost of $150 bil ion from FY2018 to 2027,19 but
this estimate understates the permanent cost of this proposal because repeal was delayed (and
there is a delay in filing estate tax returns as wel ). This proposal was not in the final legislation.
In the 114th Congress, H.R. 1105 and S. 860 would have immediately repealed the estate tax and
reduced the rate of the gift tax rate. H.R. 1105 was reported by the House Ways and Means
Committee (H.Rept. 114-52). The bil s would have provided a transition rule for assets placed in
a qualified domestic trust by a decedent who died before the effective date. The estate tax would
not apply after 10 years or after the death of the surviving spouse. The proposal was estimated to
cost $269 bil ion for FY2015-FY2025.20
Proposal to Return to 2009 Rates and Exemptions
The Obama Administration’s FY2016 budget proposals to restore the 2009 higher rates and lower
exemptions were estimated to raise $189 bil ion over 10 years.
T he Revenue Provisions Of Subtitles F, G, H, I, And J Of T he Budget Reconciliation Legislative Recommendations
Relating T o Infrastructure Financing And Community Development, Green Energy, Social Safety Net, Responsibly
Funding Our Priorities, And Drug Pricing, Scheduled For Markup By T he Committe e On Ways And Means On
September 14, 2021,” JCX-42-21, September 13, 2021, https://www.jct.gov/publications/2021/jcx-42-21/.
17 Robert B. Avery, Daniel Grodzicki, and Kevin B. Moore, Estate vs. Capital Gains Taxation: An Evaluation of
Prospective Policies for Taxing Wealth at the Tim e of Death , Board of Governors of the Federal Reserve System,
Finance and Economics Discussion Series (FEDS) 2013-28, March 2013, https://www.federalreserve.gov/econres/feds/
estate-vs-capital-gains-taxation-an-evaluation-of-prospective-policies-for-taxing-wealth-at-the-time-of-death.htm.
18 Joint Committee on T axation, “Estimated Budget Effects Of T he Conference Agreement For H.R.1, T he ‘T ax Cuts
And Jobs Act ’,” JCX-67-17, December 18, 2017, https://www.jct.gov/publications.html?func=startdown&id=5053.
19 Joint Committee on T axation, “Estimated Revenue Effects Of H.R. 1, T he ‘T ax Cuts and Jobs Act’, As Ordered
Reported By T he Committee On Ways And Means On November 9, 2017,” JCX-54-17, November 11, 2017,
https://www.jct.gov/publications.html?func=startdown&id=5034.
20 Joint Committee on T axation, “ Description of an Amendment in the Nature of a Substitute to the Provisions of H.R.
1105, T he ‘Death T ax Repeal Act Of 2015’,” JCX-68-15, March 24, 2015, https://www.jct.gov/publications.html?
func=startdown&id=4761.
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Recent Changes in the Estate and Gift Tax Provisions
Proposal to Return to the 2017 Exemption Level
The BBBA, part of the House bil in reconciliation in 2021, would restore the $5 mil ion
(adjusted for inflation, approximately $5.9 mil ion) for deaths in 2022 and after, estimated to raise
$54.3 bil ion for FY2022-FY2031. Because the exemption is already scheduled to revert to that
level after 2025, most of the revenue gain would be in the first five fiscal years.
Proposal to Tax Capital Gains at Death or by Gift
The Biden Administration has proposed to tax capital gains and dividends at ordinary rates for
taxpayers with adjusted gross income of more than $1 mil ion for joint returns, and $500,000 for
other returns. Currently, the top rate on capital gains and dividends is 20%, and the net investment
income tax of 3.8% that also applies to passive capital income in general results in a top rate of
23.8%. The top rate on ordinary income is 37%, which with the net investment income tax of
3.8% would lead to a top rate of 40.8%. Another provision of the proposals is to increase the top
rate to 39.6%, which, with the 3.8% additional tax would be 43.4%.
This increase in capital gains rates would be accompanied by taxation of capital gains at death or
by gift, with a $1 mil ion exemption. Personal property other than collectibles would be excluded
as would $250,000 of gain on homes (and any unused amount could be subsequently used by the
surviving spouse, making the total $500,000 for a couple). Family-owned businesses and farms
would not have to pay the tax until assets are sold or the business is no longer family-owned and
operated. The tax could be paid over 15 years for assets that are not liquid (i.e., other than
financial assets such as stocks and bonds). This tax may be reported on a final income tax
schedule or as part of the estate and gift tax return. The tax would reduce the size of the estate (or
gift), so that for large estates subject to the tax, the estate tax would be reduced by 43.4% on the
portion of the estate subject to tax.
Together, the increase in tax rates on capital gains and dividends and taxation of capital gains at
death or by gift are projected to raise $322.5 bil ion from FY2022 to FY2031.21
Narrow Provisions
Increase the Valuation Limits for Discounts for Businesses and Farms Based
on Use
As discussed above, farmers and businesses can value assets based on use rather than market
value, but there is a limit to the reduction in value of $1 mil ion, indexed for inflation (a $1.19
mil ion value in 2021). The BBBA would increase the limit to $11.7 mil ion. This provision is
estimated to lose $0.3 bil ion in revenue over 10 years.
Grantor Trusts Income and Transfer Tax Rules
In a grantor trust, an individual is treated as owner for income tax purposes. However, the trust
and the individual are treated as separate persons for purposes of the estate and gift tax. Grantor
trusts can be used to transfer assets out of the individual’s estate. For income tax purposes, the
grantor and the trust are treated as a unit, so that transactions between them are disregarded.
Grantor trusts can be designed so that the earnings of the trust flow through to the grantor and the
21 U.S. Department of the T reasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue
Proposals, May 2021, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf.
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Recent Changes in the Estate and Gift Tax Provisions
grantor pays the income taxes. Since these taxes are not considered gifts to the trust, the earnings
in the trust can grow tax free.
For estate and gift tax purposes, the assets of the trust are separate from the individual so that
distributions to beneficiaries are not treated as gifts under the gift tax and the assets of the trust
are not included in the estate. One technique to transfer assets into the trust is to sel an
appreciated asset to the trust in exchange for a low-interest promissory note. No capital gain wil
be realized on the transfer and no income tax paid on the interest payments. A grantor may also
swap assets of equal value that can be beneficial for tax purposes if high-basis assets (which
would yield lower capital gains if sold by the trust to a third party) are exchanged for low-basis
assets, which wil not be subject to capital gains tax at death.
The BBBA would treat the transfer of property between the grantor and the trust as a taxable
event, so that gain would be recognized on transactions (losses would not be recognized). The
revision would also include the trust in the taxable estate and any distributions made by the trust
to the beneficiaries would be treated as a gift made by the grantor and thus subject to gift tax
rules. This provision would apply to grantor trusts other than revocable trusts (revocable trusts are
included in the estate) but would be grandfathered so that only contributions and transactions with
the trust going forward would be covered and included in the estate.
These provisions would apply to al irrevocable grantor trusts—including GRATs (discussed
below), insurance trusts, and spousal lifetime access trusts, or SLATs—which are trusts al owing
lifetime benefits for spouses.
These provisions are estimated to raise $7.9 bil ion for FY2022-FY2031.
Grantor Retained Annuity Trusts
A Grantor Retained Annuity Trust (GRAT) is a trust that al ows the grantor to receive an annuity,
with any remaining assets transferred to the trust recipient. The value of the gift is reduced by the
value of the assets used to fund the annuity. If the assets in the trust appreciate substantial y, then
virtual y al of the gift can be reduced by the value of the annuity, while stil providing a
substantial ultimate gift to the recipient. If the grantor dies during the annuity period, the
remaining value of the annuity is included in the estate. This trust approach could be a method of
transferring assets roughly tax free if the assets appreciate at a rate faster than the discount rate
used to value the annuity. The grantor needs to survive over the period of the annuity. To assure
the latter wil be likely to occur, many of these trusts have very short annuity periods, as short as
two years.
Although successive short-term GRATs reduce the risk of losing control of capital by the grantor,
there is also an advantage of a long-term GRAT. If the interest rate is expected to rise, the trust
can lock in a low discount rate for the entire term. This low interest rate wil increase the value of
the annuity deduction compared with successive short-term GRATs that wil have to use the
current interest rate at the time the GRAT is established.
The GRAT proposal in President Obama’s 2016 budget proposal would have imposed a minimum
annuity term of 10 years, disal owed any decline in the annuity, and required a non-zero
remainder interest. It would have imposed a maximum term of the annuitant’s life plus 10 years.
The provision was estimated to raise $18.4 bil ion over 10 years.
As discussed above, GRATs would be affected by the BBBA provisions and assets would be
included in the estate.
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Recent Changes in the Estate and Gift Tax Provisions
Minority Discounts
The existing restrictions keep estates from engaging in artificial actions designed to reduce the
value of estates (such as freezes on assets). As discussed above, courts sometimes al ow estates to
reduce the fair-market value when assets are left in family partnerships in which no one has a
majority control. These discounts have even been al owed when assets are in cash and readily
marketable securities, and the setting up of these family partnerships has become an estate tax
avoidance tool. The BBBA would disal ow discounts for cash and readily marketable securities.
Exceptions exist for assets used for hedging transactions and business working capital. This
provision is estimated to raise $19.9 bil ion over 10 years.
Consistent Valuation
Currently, there is no explicit rule preventing a low valuation of fair-market value for an estate
and a high valuation of the asset for purposes of stepped-up basis in the hands of the heir. A low
value of an asset reduces the estate tax, but a high value (because it reduces the amount of gain)
reduces the capital gains tax. Requiring the same value for both purposes, proposed by the Obama
Administration, was projected to raise $3.2 bil ion over 10 years.
Other Minor Provisions
When generation-skipping transfers are made to a trust, the estate tax exemption applicable to
them also exempts the associated earnings during the trust lifetime. In the past, a trust life has
been limited because most states had a Rule Against Perpetuities that general y limited trusts to a
21-year life. Most of those laws have been eliminated. The Obama Administration’s proposal
would have limited the life of a generation-skipping trust to 90 years. The revenue effect would
have been negligible over the next 10 years.
Currently, the Internal Revenue Service (IRS) has a lien on estate tax deferrals for closely held
business, but these liens are for 10 years, shorter than the deferral period. This provision would
have extended the liens through the deferral period and was projected to raise $0.3 bil ion over 10
years.
Currently, payments for medical care or education made directly to the provider for another are
exempt from the generation-skipping tax and the gift tax. Taxpayers have been using trusts to
eventual y pay for these expenses and avoid tax on the accumulations. The Obama Administration
indicated that the original purpose of this provision was to exempt payments between living
persons and would have disal owed exemptions for payments to trusts. This provision would have
lost revenue in the budget horizon, $0.2 bil ion.
The executor of an estate is responsible for estate tax issues, but there is no clear federal rule
about authority to address income tax issues of the decedent form prior years. This Obama
Administration provision would have extended authority for addressing federal income tax issues
to the executor. It would have involved a negligible revenue loss.
Simplify Gift Tax Exclusion for Annual Gifts
This provision would have disal owed the unlimited use of trusts (cal ed Crummey trusts) to
expand the number of annual gift exclusions, by imposing an additional overal limit of $50,000
on gifts made via trusts. This Obama Administration proposal was projected to raise $3.4 bil ion
over 10 years.
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Recent Changes in the Estate and Gift Tax Provisions
Author Information
Jane G. Gravelle
Senior Specialist in Economic Policy
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Congressional Research Service
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