Fewer Americans will pay estate taxes this year, but wealthiest will benefit most

Starting this year, people poised to inherit significant wealth are less likely to pay federal taxes on their inheritance.

With the passage of the One Big Beautiful Bill Act, which has permanently increased the federal government's estate tax exemption, individuals can now leave up to $15 million worth of assets to their heirs completely tax-free. For joint filers, the amount has increased to $30 million. The individual limit has tripled from $5 million in 2011.

How will the increased exemption affect you? Most Americans will not be affected, at least not directly.

The new policy amounts to an estimated $5.7 million tax cut for the wealthiest residents, or 1 in 1000 estates, who glean the majority of their income from investments. In 2026, there are about 4,000 estates that exceed the exemption amount. By contrast, the average wealth transfer from baby boomers to their heirs is expected to fall short of $335,000 over the next 25 years.

"The primary effect of the tax change on most people is the federal government's larger deficit and the likely need to raise taxes or cut spending in the future," certified financial planner and estate planning attorney Ari Weisbard said.

The increased exemption is estimated to raise the national deficit by more than $212 billion over the next 10 years. For lower-income Americans, the massive increase in the estate tax exemption in recent years can be felt in the form of decreased revenue for public services such as Medicaid, Supplemental Nutrition Assistance Program and federal student loans.

For the limited few who may leave behind enough assets to surpass the exemption limit, careful tax planning is key.

"First, get very clear on your net worth, as the IRS imposes the tax on all assets, including your home, retirement accounts and business interests and even the death benefit of your life insurance," Todd Villarrubia, tax lawyer and founding partner of Wealth Planning Law Group, said.

When it comes to amounts that surpass the exemption limit, a progressive federal tax rate of 18% to 40% will apply. So for an inheritance of $20 million from an individual benefactor, the heir could be taxed up to 40% on the $5 million that surpasses the federal exemption.

With that said, estate taxes can still be reduced or even avoided altogether through strategic tax planning, including the use of trusts, charitable giving and portability, which gives married individuals the option to transfer the unused portion of their exemption to their surviving spouse.

For those who want to leave assets behind but fall far short of the exemption amount, there are still reasons to pay attention to the changes and consider updating your tax strategy. For example, if you live in a state with an estate tax exemption that's far lower than the federal threshold.

"The Illinois tax has a much lower exemption than the federal system," Villarubia said. "So families can owe Illinois tax even when no federal estate taxes are due."

The state's exemption remains at $4 million, where it was set in 2014. For assets that surpass that level, a state tax rate of 0.8% to 16% can apply.

Like federal taxpayers, Illinoisans can use gifting and trusts to shield them from estate taxes for over-limit assets. However, Weisbard advised proceeding with caution, since the state tax rate is much lower than the federal rate.

Illinois residents should also keep in mind that the value of their assets is calculated differently for state versus federal taxes. For those reasons, it's best to seek guidance from a qualified tax adviser or estate-planning attorney familiar with Illinois tax policies.

Another group that should take heed of the change is high net worth taxpayers who could have more valuable assets to pass on in the future. Even if you fall short of the limit today, consider the possibility that the future returns on your investments could push the value of your total assets beyond the federal or state exemption levels.

Regardless of whether you come close to the new exemption amount or not, it's wise to occasionally revisit your estate planning strategy.

"Many households with estate plans from many years ago have complicated living trusts and other arrangements that made sense when the estate tax exemption was much lower than it is today," Weisbard said. "These households should consult their attorney about revising their plans to make them simpler and avoid the negative capital gains tax consequences of these estate tax avoidance strategies that are no longer necessary."