Federal Estate Tax Exemption Surge Reshapes Estate Planning for Federal Employees

The federal estate tax exemption has significantly increased over the past two decades, rising from $675,000 in 2001 to $13.99 million per person in 2025. This substantial increase greatly reduces the number of estates subject to federal estate tax, altering the landscape of estate planning, particularly for federal employees and upper-middle-class families who were once vulnerable under the lower exemption threshold. Many existing estate plans were created during periods of much lower exemption limits and may no longer be optimal under current regulations, potentially leading to unexpected tax burdens for heirs.

One critical element affected by these changes is the step-up in basis, a tax provision that resets the valuation of inherited assets to their fair market value at the time of inheritance, potentially eliminating capital gains tax liabilities for heirs. Certain trust structures preserve this benefit, while others eliminate it, making trust design a vital consideration for federal employees managing their estate plans. Strategies that were once sensible, including complex trusts designed to mitigate estate taxes, may now inadvertently increase tax liabilities by disallowing the step-up in basis.

As the federal estate tax exemption continues to evolve, many older trusts, particularly irrevocable ones established under prior tax rules, could be detrimental to beneficiaries. Federal employees should conduct thorough reviews of their estate plans with qualified professionals, such as Certified Financial Planners (CFP®) or estate planning attorneys who understand federal benefits and compensation structures. These reviews should evaluate current trust provisions, state tax implications, and opportunities for trust restatement or amendment to optimize tax outcomes.

Beyond tax reduction, trust arrangements may still provide valuable benefits including asset protection, privacy, and control over distributions, which remain relevant considerations despite the diminished risk of federal estate taxes. Federal employees and their families are encouraged to align estate planning strategies with the current federal exemption landscape to ensure wealth preservation and effective transfer of assets to future generations.