Estate Tax: (Chapter 11 of the Internal Revenue Code, Sections 2001, et seq.)

1. Overview of the Federal Estate Tax:

• • The estate tax is levied on the transfer of assets at death and applies to cash, real estate, business interests, and other property owned or deemed to have been controlled (often by statute) by the decedent.
  • The estate pays the tax before distributing assets to beneficiaries, distinguishing it from inheritance taxes (which some states levy directly on recipients).

2. Estate Tax Exemption:

• • For 2025, the federal estate tax exemption is $13.99 Million per individual, or $27.98 Million for married couples. NOTE: H.R.1. increases this on a permanent basis to $15 Million, with an inflation adjustment, beginning in 2026. R.C. Section 170(p), as amended by Section 70424 of H.R.1, One Big Beautiful Bill Act.
  • The estate tax exemption is “unified” with the lifetime gift tax exemption, meaning large gifts (above the annual exclusion) made during life reduce the amount available to lower estate tax.
    • • Example: If a client has given away $8 Million of taxable gifts, shown on Form 709, this means that he has, in 2025, $5,990,000 of exemption remaining at death ($13.99 Million – $8 Million).
  • This exemption was set to revert to approximately $7 Million per individual ($14 million for couples) in 2026 due to the “sunset” provisions under the TCJA of 2017. Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017), before H.R.1. increased (and made permanent) the basis to $15 Million.

3. Deductions from Estate Tax:

• • The following are deductions from estate tax:
    • Debts of decedent and administration expenses of the Estate. 26 U.S.C. § 2053; 26 U.S.C. § 2054.
    • Marital deduction: As with the gift tax, outright or qualified trust (QTIP) gifts to surviving spouses are completely deductible. See 26 U.S.C. § 2056.

• • • Charitable deduction (including to non-U.S. Charities). 26 U.S.C. § 2055. Unlimited, meaning a taxpayer can zero out an estate by making large charitable bequests to obtain corresponding large deductions, in most circumstances.

Note: As we will discuss in more detail later in the program, bequests to charities through designation of traditional (not Roth) IRA benefits are hugely useful and more tax-efficient than charitable bequests made by Will or Trust bequests.

Split interest bequests to Charity: Within certain limits and subject to tricky rules, there are ways to leave trust remainders to charity after the death of a life beneficiary (charitable remainder “unitrusts” or “annuity trusts”) or even more unusually, trusts that first provide the equivalent of income (known as “charitable lead trusts”) to charity for a term of years, with remainder to non-charitable parties. Discussion of such split interest trusts is beyond the scope of this presentation.

4. Tax Rates:

• • Estates exceeding the exemption threshold are taxed at 40%.
  • For federal purposes, only amounts above the exemption are subject to taxation. New York, by contrast, recoups its $7.16 Million estate tax exemption rapidly after the estate tax exemption is exceeded through the infamous New York “estate tax cliff.”

5. Portability of Unused Exclusion by Surviving Spouses:

• • Portability allows a surviving spouse to claim any unused portion of her or his deceased spouse’s estate tax exemption. This requires filing IRS Form 706 within five years of the decedent’s death. Note: There is no New York State estate tax portability.

6. Generation-Skipping Exemption Transfer (GST) Tax (not relevant to this presentation):

• • The GST tax applies to transfers made to individuals two or more generations below the decedent (e.g., grandchildren). Like the estate tax, it has an exemption equal to $13.99 Million in 2025.