The Estate Tax

Ryan Heshmati

July 21, 2023

The estate tax is one of the most misunderstood taxes levied on taxpayers in the United States. The quasi-lucrative tax that is sold to voters as a way to force the wealthy to pay their fair shares accomplishes very little of its intentions. Many estates large enough to qualify for the tax avoid it with the aid of skilled attorneys and accountants, and as a result, the revenue it generates is dismal, at least relative to the annual spending budget. Moreover, many criticize the estate tax as inherently unfair for taxing wealth that, in many cases, was already taxed when acquired, explaining the popular characterization as the “death tax.”

What estates even qualify for the estate tax? As of 2023, the Federal estate tax exclusion is $12.92 million (doubled for married individuals who utilize A/B trusts to almost $26 million). This exclusion means that the first $12.92 million (or double for couples) of an estate’s assets are not taxed. On any amount above that, there is a progressive tax table that reaches the 40% mark. Since the size of the estate must be substantial for the estate tax to apply, only 0.1% of deaths result in paying, according to Americans for Tax Fairness. Unsurprisingly, when nearly nobody is paying a tax, it does not generate much revenue, with the Congressional Budget Office reporting $17.6 billion in revenues from the tax in 2020 (For reference, the personal income tax generated $1.6 trillion that same year).

Reportedly, Gary Cohen of the Trump administration asserted “only morons pay the estate tax” when advocating its repeal, according to CNBC’s Robert Frank. While put crudely, Cohen makes a legitimate point that the estate tax serves little purpose because it is easily circumvented. In a ProPublica piece, the authors explain, “It’s well known, at least among tax lawyers and accountants for the ultrawealthy: The estate tax can be easily avoided… By using special trusts,” going on to name Grantor-retained annuity trusts (GRATs). The special trusts enable the tax-free passing of large sums of money, as explained below:

“A typical GRAT entails putting assets, like stocks, in a trust that ultimately benefits a person’s heirs. The trust pays back an amount equal to what the trust’s creator put in plus a modest amount of interest. But any gains on the investments above that amount flow to the heirs free of gift or estate taxes.” - Jeff Ernsthausen, James Bandler, Justin Elliott, and Patricia Callahan of ProPublica.

The ineffectiveness of the estate tax aside, critics also question the fairness of the estate tax. Many argue that it amounts to double taxation that seeks to penalize success. Likely because of the perception as a “death tax,” the tax is not particularly popular, with a TIPP/ Investor’s Business Daily poll finding only 39% “somewhat” or “strongly” oppose its repeal.

While affecting a tiny percentage of the population today, the 2025 expiration of the Trump administration’s estate tax exclusion increases will enlarge its impact. Regardless of the estate tax’s existence, however, attorneys and accountants will likely aid the very richest in avoiding the tax specifically intended to hit them the hardest. The estate tax, at least for now, appears symbolic of a challenge to the ultra-rich rather than a real threat to their fortunes. However, future legislative decisions could change that; only time will tell.