Now that Donald Trump has been inaugurated, what can we expect to happen to U.S. estate tax?
There has been a rapid flurry of executive orders and announcements since the January 20, 2025 inauguration, but not yet any guidance on what to expect for U.S. estate tax in 2025 and afterwards.
2025 is a big year because the lifetime exclusion amount is set to decrease on January 1, 2026 to $5M (USD) adjusted for inflation since 2011 unless legislation is passed by U.S. Congress. As well a number of other tax cuts will expire. For U.S. lawmakers, 2025 could be a major year for tax reform.
By way of background, the Tax Cuts and Jobs Act (“TCJA”) was passed by the U.S. Congress and signed into law in the first Trump administration and reduced income taxes and estate taxes, but it contained a sunset provision of December 31, 2025.
If these changes are made permanent, they would increase U.S. deficits by an additional $2.7 trillion for fiscal years 2025 to 2034. However, estate taxes are only a small component and if made permanent would reduce revenues by $167 billion for 2025-2034. Federal revenue collected by the U.S. estate tax is small, and is projected to be $32 billion for 2024 which is less than 1% of all projected federal revenues.
Very few U.S. estate tax returns filed end up paying estate tax – just over 7,000 for 2024 but this would almost triple if the exclusion amount reverts to the prior threshold amounts of about $7M (USD) adjusted for inflation. The current federal and gift tax exclusion is approximately $14M (USD) per person ($13.99M (USD) to be exact) or approximately $28M (USD) per married couple.
The Trump electoral platform contained a plan for tax reform including ultimate repeal of U.S. estate and gift tax and in their place a capital gains tax for gains of over $10M (USD). Trump also made a campaign promise to make the TCJA permanent, and it remains to be seen whether the TCJA will be extended and/or made permanent.
There is speculation there likely will be estate tax reform with Trump as President and Republican control of the House of Representatives and Senate within approximately two years, and that there will be an extension beyond 2025 of the TCJA and the larger exclusion amounts.
To be cautious, it is important to monitor the state of play on U.S. estate tax, get proper professional advice and have a plan in place in case the U.S. Congress fails to pass an extension. And of course, should there be Democrat control of the U.S. Congress in the future, any reforms could be changed again!
Also, it is important to keep in mind several U.S. states impose an estate tax (12 states and the District of Columbia) or an inheritance tax (6 states) which must be considered in addition to any changes to the federal U.S. estate tax.
For Canadian residents who are not U.S. citizens, green card holders or otherwise considered domiciled in the U.S. for U.S. estate tax purposes, and who own U.S. situs property, a reduction of the U.S. exclusion amount by half could have significant impact if your worldwide estate is over approximately $7M (USD), and more Canadians will have U.S. estate tax exposure than if the larger exclusion amount, currently approximately $14M (USD) for 2025 is extended or made permanent.
Certain relief is available against U.S. estate tax under the Canada – U.S. Tax Treaty which is relevant for those whose worldwide estate exceeds the exclusion amount. As well, there is a basic general exclusion amount of $60,000 (USD) which covers U.S. situs assets up to that amount. It is necessary to prepare a detailed calculation in order to determine the amount of estimated U.S. estate tax liability.
Stay tuned in 2025 as we move forward on new developments in U.S. estate tax and U.S. tax reform.
— Margaret R. O’Sullivan