How Should the U.S. Tax the Great Wealth Transfer?

I. The Wealth of the Older Generation and Its Bequests

The large rise in net worth over the past two decades was concentrated among older people. The bequeathable net worth of households rose from about 270% of GDP in 1997 to about 465% in 2021. The increase was almost all (96%) accrued to households in which the respondent is aged 55 and older. This increase was also skewed towards the wealthy; 74% of the increase accrued to the wealthiest 10% of households aged 55 and older. As a result, wealth for older households has consistently trended upward relative to subsequent generations. In this, the United States is not unique; similar trends have occurred in other advanced countries.

Source: Authors’ Calculations using the Survey of Consumer Finances (SCF)

A substantial share of the wealth held by households aged 55 or older will be held until death – especially among the very wealthiest households. This is a historically consistent pattern. It means that this wealth will be bequeathed to future generations. 

With the current state of inheritance taxes, this transfer will maintain family dynasties and expand absolute wealth differences among households in the recipient generation.¹ There is no federal inheritance tax. Unrealized capital gains held until the owner’s death completely escape income tax and thus are taxed only under the estate tax, if at all. The estate tax, in turn, has been all but eviscerated over the past 25 years by a variety of policy changes, including major tax cuts in 2001 and 2017 and a smaller tax cut in 2025. 

The reduction in inheritance taxes has implications for government revenues. In 1972, 6.5 percent of decedents paid estate taxes, generating approximately 0.4 percent of GDP in revenues. By 1997, those figures fell to 2.1 percent and 0.19 percent, respectively. In 2021, fewer than 0.1 percent of decedents — one out of every 1,300 — paid any estate taxes, and the tax raised just 0.08 percent of GDP in revenue.² The reduction in revenues is especially noteworthy, given how much net worth rose over the same period.

II. Wealth Transfer Taxes

Wealth transfers taxes³ are levied on bequests and gifts, and there is an integrated set of estate, gift, and generation-skipping taxes in the United States, but only for a very small slice of the population and a small slice of wealth.

The estate tax is imposed on decedents’ wealth to the extent that taxable estate exceeds $15 million per individual ($30 million per married couple.) This exemption amount is indexed for inflation. The taxable estate includes real and financial assets, the decedent’s share of jointly owned assets, and life insurance benefits that are payable to the estate. While there are technically graduated tax rates and brackets, the personal exemption (applied as a credit) has risen to exceed the beginning of the top bracket in recent years. Under current law, a flat tax rate of 40 percent is applied on taxable transfers above $15 million.⁴

• The tax allows deductions for debt, spousal transfers, charitable contributions, funeral expenses, attorney’s fees, executor’s fees, and a broad “other” category. The unlimited deduction for spousal transfers is of particular note because it can eliminate federal taxes for the first spouse to die in a married couple.

The tax contains special exceptions for small businesses and family farms. If a farm or small business comprises at least 35 percent of the net value of the estate, the tax on the small business or farm portion of the estate can be paid in installments over 14 years, with payments determined using a lower-than-market interest rate and with interest only due on the first five years. A closely-held small business may be able to claim additional valuation discounts for a minority share, because minority shareholders are limited in their scope of control over the business, which reduces the market value of their holdings.

Gift taxes are subject to large exemptions. Gifts are distinct from bequests in that they are given while the donor is alive. As of 2026, the gift tax provided a lifetime exemption of $15 million per donor ($30 million for a married couple). This exemption is sometimes said to be integrated with the estate tax exemption, meaning that a gift will reduce the exemption amount that is available for the estate tax. For gifts above the exemption, donors face the same tax brackets as the estate tax, including a top rate of 40 percent. There is an additional annual gift tax exclusion ($19,000 in 2026), which is indexed for inflation in $1,000 increments and granted separately for every donor-recipient combination. Gifts received are not taxable income for the recipient. Also, a spouse may use any remaining unused portion of the decedent’s exemption in addition to their own exemption.

There are at least two key differences in the tax treatment of gifts and bequests. First, people who receive gifted assets and then sell them have to pay capital gains taxes on the entire capital gain from when the donor of the gift bought the asset. In contrast, the capital gains on assets transferred as part of a bequest are never taxed under the income tax – the so-called “Angel of Death” loophole. This provision not only loses billions of dollars in revenue but also distorts behavior — individuals are incentivized to hold capital assets for their entire lifetime to avoid taxation when that capital might be more efficiently employed elsewhere (Kinsley 1987). Bricker et al. (2020) estimate that in 2019, unrealized capital gains accounted for 27 percent of all household wealth and 41 percent of the wealth held by the top 1 percent. The second difference is that the tax rate on gifts is imposed on a tax-exclusive basis (the tax is quoted as a share of the gift received) while the estate tax is imposed on a tax-inclusive basis (the tax is imposed on the sum of the tax and the after-tax bequest).

There is also a separate tax to beneficiaries who are more than one generation below the donor. The generation-skipping transfer tax (GSTT) is applied in addition to the estate or gift tax and imposed on transfers that are either direct or through a trust (or other similar arrangements) to a beneficiary who is more than one generation below the transferrer. For 2026, the generation-skipping transfer tax had an exemption of $15 million (unified with the estate and gift tax exemptions). The GSTT rate is 40 percent.

III. Inheritance Taxes

Inheritance taxes are distinct from estate and gift taxes. Inheritance taxes are placed on the recipient of transfers, whereas estate, gift, and GSTT taxes are placed on the donor or the estate of the donor.

The federal government does not tax inheritances received, as opposed to estates, but such taxes exist in several states. As of 2023, six states imposed inheritance taxes (TPC 2023).⁵ Typically, tax rates vary with the recipient’s proximity to the decedent, the size of the inheritance, or both. For example, Pennsylvania taxes inheritances at a flat rate of 4.5 percent for direct descendants, 12 percent for siblings, and 15 percent for other recipients (Pennsylvania Department of Revenue 2024). New Jersey imposes an inheritance tax of up to 16 percent of inheritances received and varies the exemption and rate by both relationship to the decedent and size of the inheritance (New Jersey Treasury 2020).

Some other countries have inheritance taxes. As of 2020, 20 of the 36 OECD countries taxed inheritances (compared to only four that taxed estates – the United States, the United Kingdom, Denmark, and Korea), all according to some combination of the relationship to the decedent and the size of inheritance received (OECD 2021). For example, France varies marginal tax rates based on the size of the inheritance and the relationship to the decedent. Italy, Denmark, and others vary the tax rate based only on the relationship to the decedent (with lower rates for close family members). Exemption levels vary substantially across countries, ranging from as low as $17,000 from 1990-2018 in Spain to $1.1 million from 2007-2018 in Italy. Above the exemption level, countries often differentiate among asset types. France, Germany, and Spain tax main residences at preferential rates, and Spain excludes private pensions from the tax base. Many countries preferentially tax transfers of family-owned businesses.⁶ Wealth transfer taxes generate less than 2% of aggregate tax revenues in all OECD countries and less than 1% in all but four countries (OECD 2021) but may well be more popular than estate taxes (Stantcheva 2021).

IV. Tax Reform

Taxes on the transfer of wealth are significantly more progressive than the income tax and could, given the upcoming large wealth transfer, raise significant revenues. The impending “Great Wealth Transfer” offers policy makers an opportunity for progressive, deficit-cutting tax reform.

Substantial revenue could be raised from wealth transfer taxes. The revenue raised by the estate tax would increase markedly if the U.S. reverted to estate tax policies that were previously in place. The estate tax law as of 2021, which had a top rate of 40% and a personal exemption of $11.7 million, raised $19.9 billion. An estate tax with 2013 rates and brackets adjusted for inflation (a top rate of 40% and an exemption of $6.1 million) would have raised $42.6 billion in 2021. An estate tax with 2001 rates and brackets adjusted for inflation (a top rate of 55% and an exemption of $1.03 million) would have raised $143.6 billion in 2021 – more than seven times what the estate tax raised in 2021.

An inheritance tax could be imposed. An inheritance tax at a 37% rate (the current top income tax rate) could raise $44 billion with a $1 million exemption, $26 billion with a $2 million exemption, $17 billion with a $3 million exemption, and $14 billion with a $4 million exemption.

Exempting income tax on unrealized capital gains is a loophole that could be closed. There are two ways this could be accomplished. First, capital assets could be subject to carryover basis at death (as with gifts given by living people). Heirs would receive the asset with the original basis and, when they sold the asset, they would be taxed on the full capital gain rather than (under current rules) just the appreciation that occurs after they receive the bequest. Congress enacted this approach in 1976 legislation but repealed it in 1980 before it ever went into effect. CBO (2022) estimates that implementing carryover basis at death starting in 2023 would have raised an additional $2 billion in revenue in the first year and $156 billion over 10 years. Alternatively, previously unrealized capital gains could be taxed directly at death, a provision sometimes referred to as “constructive realization.” Canada, for example, has no estate or inheritance tax but treats death as a realization event (Canada Revenue Agency 2024a, OECD 2021). To address liquidity issues, Canada exempts capital gains on principal residences and provides a lifetime deduction of 1 million Canadian dollars for qualified farm and fishing property (Canada Revenue Agency 2024b).

• A tax on unrealized capital gains at death can raise up to $38 billion without an exemption (except for $500,000 on personal residences, for administrative simplicity), almost twice as much as the current estate tax. The tax would raise $24 billion with a $1 million exemption. But the revenue estimate only drops to $19 billion with $2 million exemption or $13 billion with a $4 million exemption. The relative lack of fall off in revenue as the exemption rises reflects the fact that unrealized gains at death are highly concentrated among the very wealthiest households, who tend to hold very large stocks of unrealized gains. Since inheritances are more dispersed than unrealized gains at death, any increase in the inheritance tax exemption cuts into the revenue-raising power of an inheritance tax more substantially.

V. Conclusion

Taxing intergenerational wealth transfers appropriately and judiciously creates an opportunity to raise revenue, increase the extent of equal opportunity, reduce inequality and limit the role of family dynasties in the economy. The current transfer tax system, however, has been eviscerated in recent years and is ill-equipped to help society reach these goals. These issues are of current interest as Congress looks for ways to close the fiscal gap.