by Jack Aguillard
With the federal gift and estate tax lifetime exemption amount currently set to sunset and return to pre-Tax Cuts and Jobs Act levels in 2026, tax and estate planning attorneys and other professionals are facing huge uncertainties. The gross estate threshold amount excluded from the estate tax will essentially be reduced by 50% from $10 million to $5 million. However, these figures are indexed annually for inflation, so the current threshold amount in 2022 is $12.06 million. Although these taxes affect a very small percentage of the American population—roughly only 0.2% of decedents paid the estate tax in recent years—they still create big issues. Specifically, attorneys and advisors in this area will soon be forced to speculate as to whether Congress will revive the current lifetime exemption limit or allow it to sunset, reverting back to the pre-Tax Cuts and Jobs Act amount.
This uncertainty carries with it grave consequences: Practitioners will have to answer clients’ questions as to whether they must gift away more and reduce their estates to avoid hefty taxes. For example, wealthy individuals with an estate currently somewhere between $6 million and $12 million are forced to speculate as to what their wealth will be in 2026 to determine whether to give away a few million dollars’ worth of their estate to avoid leaving a massive tax liability. This tax raises very minimal revenue regardless of whether the lifetime exemption amount is set at $12 million or $6 million, but it is obvious that oscillating number, often driven by partisan motives, deals a crushing blow to taxpayers and professionals. This post does not advocate for the removal of the estate tax but merely argues that taxpayers would greatly benefit from leaving the current exemption amount where it stands at the end of 2026, while simultaneously resulting in practically no detriment to the federal government. In other words, because the gift and estate taxes are not going to be repealed, nor will they generate much revenue, why can’t the lifetime exemption amount at least be kept stable?
I. The Operations of the Gift and Estate Taxes
Before addressing the issues that the gift and estate taxes pose to United States taxpayers, tax and estate planning attorneys, and financial professionals, it is first necessary to address how the gift and estate taxes operate. Although commonly referred to as a singular tax, the gift and estate tax provisions are located in two separate Internal Revenue Code (Code) sections that work in tandem. Specifically, these two taxes “are often considered together because they are subject to the same rate and share the lifetime exemption amount” and, thus, will occasionally be referred to herein as the gift and estate tax, or simply the estate tax.
The unified credit is the first concept critical to the operation of the estate tax. The unified credit, located in § 2010 of the Code, is the amount of one’s estate that can be excluded from the estate tax. This credit is referred to as unified because the excludable amounts under both the gift tax and the estate tax are combined to determine the amount of one’s estate that can be excluded from the estate tax. Put another way, when a taxpayer dies, his or her estate will be subject to a 40% tax on any amount of the estate that exceeds the lifetime exclusion, with any amount of gifts that is not itself excluded during the decedent’s lifetime further reducing this exclusion.
The gift tax, imposed via Code § 2501 and defined in Code § 2503, applies to transfers an individual makes during his or her life, whereas the estate tax is not levied until the decedent’s property is transferred at death. The gift tax permits a donor to make a gift in the amount of $10,000, indexed for inflation to $16,000, without having that amount included in the donor’s total amount of gifts made during that year nor paying taxes on that gift. A donor can make these excludable gifts to an unlimited number of recipients. However, when a donor makes a gift that exceeds the applicable annual exclusion amount, that donor will be taxed at a rate of 40% on the amount of taxable gifts that exceed the exclusion amount, i.e., $16,000. Gifts exceeding the annual exclusion must be reported on a gift tax return via IRS Form 709.
To understand the consequences of exceeding the annual exclusion amount for gifts in a taxable year, it is necessary to next address the estate tax, which is where the unified credit makes its true impact. The estate tax is levied by Code § 2001, which states that “[a] tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.” The taxable estate is the value of the gross estate reduced by certain deductions. In turn, the gross estate, defined loosely here, is comprised of property actually owned by the decedent at death as well as several other items of value that are considered to be owned by the decedent such as life insurance proceeds and jointly owned property.
Thus, under the current estate tax exemption, a taxpayer who dies in 2022 and owns an estate valued in excess of $12.06 million must file an estate tax return and be subjected to the estate tax at a rate of 40% on the portion of the decedent’s estate exceeding that amount. However, gifts made during the decedent’s lifetime that exceed the annual exclusion amount in § 2503(b) are added to the taxable estate under § 2001(b) and subjected to the estate tax if the decedent’s estate exceeds the exemption threshold. In other words, because the gift and estate taxes work in tandem due to the unified credit, any gifts not protected by the annual gift tax exclusion reduce the lifetime gift and estate tax exemption.
The operation of the gift and estate taxes in 2022 can be summarized as follows: Each taxpayer is permitted to make yearly gifts without being taxed so long as the gifted amount to each donee does not exceed $16,000. When that amount exceeds this threshold, the donor must file a gift tax return, and his or her “lifetime estate and gift exemption is reduced by the gift’s value in excess of $1,000.” Upon the death of a taxpayer, the estate tax is imposed at a rate of 40% on any portion of his or her gross estate that exceeds $12.06 million, but this exemption amount can be reduced by any gifts the decedent made during his or her lifetime that exceeded the annual gift tax exemption.
II. Revenue, or Lack Thereof, Raised by the Gift and Estate Taxes
In 2021, gift and estate taxes generated $27.1 billion in revenue for the federal government. However, the federal government collected $4.05 trillion in revenue for 2021. The revenue collected by the gift and estate taxes amounts to only 0.5% of the federal government’s total receipts. Thus, when viewed as a whole, it is rather clear that the gift and estate taxes play a very small role when it comes to generating revenue for the federal government.
However, the logical objection to this notion is that once the gift and estate tax exemption amount sunsets in 2026 and reverts back to pre-TCJA levels, one can assume that the revenue generated by these taxes will greatly increase. Yet, this is unlikely to be the case. As Congressman Jim Saxton stated in a study for the Joint Economic Committee, “The detrimental effects of the estate tax are grossly disproportionate to the modest amount [of] federal revenue it raises.” According to a 2020 congressional budget report, the estate and gift taxes generated $17.6 billion in revenue, which amounted to 0.5% of the federal government’s total receipts. The Congressional Budget Office (CBO), noting that “[e]state tax revenues are projected to increase sharply after 2025, when the exemption amount is scheduled to drop,” projects these tax revenues to increase to $49.5 billion in 2031. However, when taking into account the projected federal revenue for 2031, the gift and estate taxes, even when considering the reduction in overall exemption amount, only amounts to 0.86% of the federal government’s revenue.
III. In Addition to a Lack of Revenue Generation, There are Additional Reasons to Not Reduce the Exemption Amount
While the gift and estate taxes clearly fail to raise any significant revenue for the federal government, Professor Edward J. McCaffrey notes that the estate tax incentivizes wealthy individuals to die with minimal amounts in their estates, instead encouraging that “the wealthy spend down their wealth on lavish consumption, and discourag[ing] economically and socially beneficial intergenerational saving.” Furthermore, complying with this federal estate tax scheme comes at a great cost. For example, three studies concluded that the costs paid to ensure compliance with the tax “exceed[ed] the revenue yield of the tax itself.”
Plus, the looming estate tax likely disincentives taxpayers to work hard and build long-term wealth, as no rational person would wish to burden one’s heirs with a potential tax liability in the millions. Lastly, the estate tax discourages capital investment by levying a hefty tax on those who build and maintain a large domestic capital stock, i.e., one’s gross estate. Instead of encouraging “investment in capital such as commercial structures and business equipment that enhance labor productivity,” the estate tax “negatively impact[s] economic growth.”
The proof is in the pudding here. When observing the gross estates of those who paid the estate tax, “[s]tock and real estate made up over half of all estate tax decedents’ asset holdings reported on returns filed in 2019.” Wealthy individuals are discouraged from making capital investments, such as in real estate which can later be used to house commercial activity that would generate labor, and instead spend down their gross estate to avoid paying the hefty estate tax.
Perhaps a brief example will illustrate the dilemma taxpayers are currently facing. Suppose John, who has never been married but has one adopted child, owns and operates a security technology business as a sole proprietor. It is currently in the early months of 2025. John is in declining health but wishes to continue working for as long as physically possible. John owns a large home with substantial acreage, valued at $2 million, and his security technology business was recently valued at $9 million. John wishes to leave everything he has to his one adopted child. However, John has a major problem. Assuming his estate is valued at roughly $11 million, John is quickly approaching the threshold amount of the lifetime exclusion. Furthermore, with the lifetime exemption set to sunset in 2026, John may be already over the threshold, but he cannot know for certain. Thus, John is left with very limited options: (1) he can spend down his wealth to reduce his estate value to below $5 million to ensure he remains under the exemption amount if he lives until 2026; (2) he can place his assets in an irrevocable trust and relinquish control of much of what he worked so hard to build and acquire to avoid his assets being included in his lifetime estate at death; or (3) he can do nothing and instead live out his days worried while hoping that Congress decides to keep the lifetime exemption at its current amount of $12.06 million. In any event, John is in a lose-lose situation.
While very few people pay these wealth transfer taxes, the impact is surely felt by those to whom it applies. Not only does the estate tax raise very little revenue, but it also disincentivizes capital investment and stunts economic growth. Thus, it is hard to find a logical reason to punish wealthy individuals while generating little revenue in return. Nor is there a valid reason to create stress for taxpayers, attorneys, and financial professionals by jerking around the lifetime exemption amount. While the estate tax probably should not, nor likely ever, be totally abolished, the least Congress can do is provide stability and certainty for elderly taxpayers who are subject to the estate tax by allowing the annual exemption to sit where it currently stands.
 I.R.C. § 2010(c)(3)(C). “In the case of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting ‘$10,000,000 for $5,000,000.” Id. Subparagraph (A) states that “[f]or purposes of this subsection, the basic exclusion amount is $5,000,000.” Id. § 2010(c)(3)(A).
 See Id. § 2010(c)(3)(C). “In the case of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting ‘$10,000,000 for $5,000,000.” Id. Subparagraph (A) states that “[f]or purposes of this subsection, the basic exclusion amount is $5,000,000.” Id. § 2010(c)(3)(A).
 Id. § 2010; see also Estate Tax, Internal Revenue Serv. (Sept. 14, 2022), https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax [https://perma.cc/5V2Z-AGL6]. As an aside, individuals who are married can combine their lifetime exemption amounts. See I.R.C. § 2010(c)(2)(B). However, for purposes of this paper, all applications of the exemption amount will be made on the premise of a single, unmarried taxpayer.
 Greg Iacurci, Here’s how many people pay the estate tax, CNBC (Sept. 29, 2021, 11:14 AM), https://www.cnbc.com/2021/09/29/heres-how-many-people-pay-the-estate-tax-.html [https://perma.cc/RWS6-7KVL].
 See, e.g., Edward J. McCaffery, Grave Robbers: The Moral Case against the Estate Tax, Pol’y Analysis, Oct. 4, 1999, at 3 (“Under the Tax Reform Act of 1976, the estate and gift tax structures were combined into a single unified gift and estate tax system, which might be more accurately described as a wealth transfer tax. It applies to the cumulative taxable transfers made by a taxpayer during life and at death.”). See generally I.R.C. § 2501 (imposition of the gift tax), § 2001 (imposition of the estate tax).
 Cong. Budget Off., Understanding Federal Estate and Gift Taxes (June 2021), https://www.cbo.gov/system/files/2021-06/57129-Estate-and-Gift-Tax.pdf [https://perma.cc/94UA-CJYK].
 I.R.C. § 2010; see also John A. Miller & Jeffrey A. Maine, Wealth Transfer Tax Planning After the Tax Cuts and Jobs Act, 46 BYU L. Rev. 1411 (2021) [hereinafter Miller & Maine, Wealth Transfer Tax Planning].
 John A. Miller & Jeffrey A. Maine, The Fundamentals of Wealth Transfer Tax Planning: 2011 and Beyond, 47 Idaho L. Rev. 385, 424 n.254 (2011).
 See generally Cong. Budget Off., supra note 6.
 I.R.C. § 2501(a)(1) states: “A tax . . . is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual resident or nonresident.”
 See generally id. § 2503.
 Id. § 2501; see also Cong. Budget Off., supra note 6.
 I.R.C. § 2503(b). Specifically, this provision states that “the first $10,000 of such gifts to such person shall not, for purposes of subsection (a), be included in the total amount of gifts made during such year.” Id. I.R.C. § 2503(b)(2) provides for the inflation adjustment. See also U.S. Department of the Treasury, Internal Revenue Service, What’s New – Estate and Gift Tax, available at https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax#:~:text=The%20annual%20exclusion%20for%20gifts,the%20annual%20exclusion%20is%20%2416%2C000 [https://perma.cc/M4P6-6FYC], where the Internal Revenue Service states that the exclusion for gifts is $16,000 in 2022.
 I.R.C. at § 2503(b)(1).
 See id. § 2001(c); see also Miller & Maine, Wealth Transfer Tax Planning, supra note 7, at 1454.
 Hayden Adams, The Estate Tax and Lifetime Gifting, Charles Schwab (Mar. 14, 2022), https://www.schwab.com/learn/story/estate-tax-and-lifetime-gifting [https://perma.cc/CE52-S5W6].
 I.R.C. § 2001.
 Id. § 2051.
 Miller & Maine, Wealth Transfer Tax Planning, supra note 7, at 1417–18.
 Id. at 1453. The estate tax rate schedule is graduated, but “it currently operates as a 40% flat rate tax because of the size of the unified credit exclusion amount in § 2010(c) . . . .” Id. at 1417 n.23.
 I.R.C. § 2001(b); id. § 2503(b).
 Adams, supra note 16.
 See Cong. Budget Off., supra note 6, at 2. While the Internal Revenue Code states the annual gift exclusion amount at $10,000, the Code also provides for an annual adjustment for inflation. See I.R.C. § 2503(b)(2).
 Sources of Revenue for the Federal Government: Revenue by Source Categories in 2021, Datalab, https://datalab.usaspending.gov/americas-finance-guide/revenue/categories/ [https://perma.cc/X39C-TA2L] (last visited Sept. 27, 2022).
 How much revenue has the U.S. government collected this year?, Datalab, https://datalab.usaspending.gov/americas-finance-guide/revenue/ [https://perma.cc/WV2R-W667] (last visited Sept. 27, 2022).
 Cong. Budget Off., supra note 6, at 6.
 Vice Chairman Jim Saxton, Joint Econ. Comm. U.S. Cong., The Economics of the Estate Tax: An Update (June 2003), https://www.jec.senate.gov/public/_cache/files/0b5f298b-e2a6-4836-8c6a-2a7bffe035f4/the-economics-of-the-estate-tax—an-update-06-18-03.pdf [https://perma.cc/XX7Z-ZU7T].
 Cong. Budget Off., supra note 6, at 6.
 This figure is reached by dividing the projected revenue of the gift and estate taxes, $49.5 billion, by the projected overall revenue of the federal government, $5,771 billion. See Con. Budget Off., The Budget and Economic Outlook: 2021 to 2031 (February 2021), https://www.cbo.gov/system/files/2021-02/56970-Outlook.pdf [https://perma.cc/94HB-HN36]; Cong. Budget Off. supra note 6.
 McCaffery, supra note 5, at 1.
 See generally David Block & Scott Drenkard, The Estate Tax: Even Worse than Republicans Say, Tax Found. Fiscal Fact (Aug. 29, 2012), https://files.taxfoundation.org/legacy/docs/ff326.pdf?_gl=1*6s49l8*_ga*MjEwOTI0NjQxMi4xNjYyNjcxNzAx*_ga_FP7KWDV08V*MTY2MjY4MDcwOS4yLjEuMTY2MjY4MDc3OS42MC4wLjA [https://perma.cc/E36F-QV8C].
 Id. at 3 (citing Henry J. Aaron & Alicia H. Munnell, Reassessing the Role for Wealth Transfer Taxes, 45 Nat’l Tax J. 119 (1992); Douglas Bernheim, Does the Estate Tax Raise Revenue?, 1 Tax Pol’y & Econ. 113, 113–38; Alicia H. Munnell, Wealth Transfer Taxation: The Relative Role for Estate and Income Taxes, New England Econ. Rev. 19 (1988)).
 Scott Eastman, New IRS Data Reiterates Shortcomings of the Estate Tax, Tax Found. (Oct. 18, 2018), https://taxfoundation.org/new-irs-data-reiterates-shortcomings-estate-tax/ [https://perma.cc/R3CJ-LW8A].
 U.S. Department of the Treasury, Internal Revenue Service, Publication 5332: Estate Tax Returns Filed for Wealth Decedents, Filing Years 2010–2019, https://www.irs.gov/pub/irs-pdf/p5332.pdf [https://perma.cc/B5KF-JV49] (last visited Sept. 27, 2022).
 See generally I.R.C. § 2038. However, to also avoid the gift tax, John would need to create a Crummey Trust. See generally Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968).
 See infra text accompanying notes 33–35.
 See infra text accompanying notes 26–28.