The United States stands on the cusp of the largest intergenerational transfer of wealth in its history. In coming decades, as the baby boom generation ages and eventually passes away, tens of trillions of dollars (no misprint) will change hands. Yet America’s system for taxing these transfers has been so weakened in recent decades that it barely functions. In 2021, only about one in every 1,300 decedents were required to pay any federal estate tax at all.

The mismatch between soaring wealth transfers and vanishing wealth tax revenue creates an opportune moment to reconsider how we approach the taxation of large transfers. Should we restore the estate tax to its former role? Should we follow the lead of other developed nations and tax inheritances received rather than estates bequeathed? Or should we take a different approach entirely, such as treating death as an occasion to tax previously unrealized (and therefore previously untaxed) capital gains?

These questions take on particular urgency given recent trends in wealth concentration. Data from the Federal Reserve’s Survey of Consumer Finances show that wealth that could be transferred has jumped from 2.5 times the GDP in 1997 to over four times the (much larger) GDP in 2021. Even more striking is who holds this wealth: 97 percent of the increase has accrued to households where at least one person is 55 or older, and threequarters has been accumulated to the wealthiest tenth of that age group. Households headed by someone 55 or older now control 71 percent of the nation’s bequeathable wealth, up from 54 percent in 1997.

This concentration matters because wealth transfers tend to maintain and even exacerbate inequality across generations. Research shows that the top tenth of households by wealth receive 56 percent of all intergenerational transfers, while the bottom half receives just 8 percent. What’s more, wealthy parents tend to have children who are wealthy in their own right, and thus substantial inheritances further augment wealth inequality. Much is thus at stake here. Addressing wealth transfers via judicious policy reform could stem the creation of family dynasties, make taxes fairer, increase economic mobility and raise substantial revenue at a time when inequality is a major source of social discontent and the federal deficit is large and expanding.

The Great Wealth Transfer

As already alluded to, there have been dramatic shifts in American wealth distribution over the past quarter century, with important implications for inheritance and tax policy. Between 1997 and 2021, the total wealth that could potentially be passed down to future generations – what we call bequeathable wealth – surged from an estimated 256 percent of GDP to 425 percent of GDP. This massive increase was certainly not spread evenly across the population. Instead, it reflects profound demographic and economic changes that have reshaped wealth accumulation in America.

Two major trends drive this transformation. First, the number of households headed by someone 55 or older has roughly doubled, while the number of younger households has remained relatively flat. This demographic shift largely reflects the aging of the baby boom generation, whose members were between 33 and 51 years old in 1997 and between 57 and 75 in 2021.

Second, older households saw their average wealth grow much faster than younger ones. The numbers are striking: after adjusting for inflation, the average wealth of households headed by someone 75 or older was two and a half times higher in 2021 than in 1997 for households the same age. For those in age groups 65-74 and 55-64, the 2021 figures were 2.1 and 1.8 times the ratios for their 1997 counterparts, respectively. Younger households did, on average, share in the bounty but experienced much more modest gains, with their real wealth growing by just 50-60 percent over the same period.

The combination of these trends – more older households accumulating wealth faster – means that nearly all the increase in national wealth went to households headed by someone 55 or older. Even more remarkably, within this older group the vast bulk of the wealth increase went to the top tenth of households. This affluent subset alone accounted for almost three-quarters of all new wealth accumulation relative to the size of the economy.

The Not-So-Invisible Tax Break

Two features of the tax system are especially salient for explaining the dimensions of wealth buildup, and accordingly the potential for altering the distribution with wealth transfer taxes. First, much of the accumulation has never been taxed. More than one-third of all bequeathable wealth in 2021 consisted of unrealized capital gains – that is, increases in the value of assets that haven’t been sold and therefore haven’t triggered capital gains taxes. Indeed, unrealized gains consisted of a whopping 38 percent and 50 percent of wealth for the top 10 percent and 1 percent, respectively.

Unrealized capital gains reflect the “deferral” principle in our income tax system. For example, taxpayers can claim depreciation on assets that are stable or increasing in value as a “cost” of doing business. Deferral strategies have become more sophisticated in the past quarter century – especially in pass-through businesses – leading to a systematic deterioration of the income tax base. The internal logic of the income tax relies on the presumption that this accounting-based deferred income will eventually be taxed as capital gains.

However, under current law, these gains escape income taxation entirely when assets are passed on at death, thanks to a provision known as “step-up in basis.” These untaxed gains are even more concentrated among the wealthy than overall wealth. The top 1 percent of households headed by someone 55 or older controlled unrealized gains equal to about $11 trillion, or 47 percent of GDP, in 2021 and accounted for almost half of all growth in unrealized gains since 1997. This concentration means that the wealthiest Americans are increasingly able to pass on large fortunes that have never been subject to income taxation. As Billie Holiday put it, “God bless the child that’s got his own."

Incredible Shrinking Estate Tax

Second, the estate tax’s declining role represents a dramatic shift in American tax policy. In 1972, about 6.5 percent of deaths resulted in estate tax liability, generating revenue equal to 0.42 percent of GDP. By 2021, despite the massive increase in bequeathable wealth noted above, the tax raised just 0.08 percent of GDP from the less than 0.1 percent of decedents with liability.

The dramatic thinning of the estate tax stems both from policy changes and aggressive avoidance techniques. Cuts were made in 1981 and 1997 as part of broader tax policy changes. The Bush tax cuts of 2001 reduced estate tax rates, boosted the exemption and eliminated the estate tax for one year in 2010, replacing it with a provision (explained below) called “basis carryover.” Then the first Trump administration’s Tax Cuts and Jobs Act of 2017 more than doubled the exemption to $11.18 million per person ($22.36 million for married couples) and indexed it for inflation.

In 2025, the taxable estate above the exemption of $13.99 million faced a top tax rate of 40 percent. But in most cases, the effective exemption is substantially higher since the tax allows deductions for spousal transfers, charitable contribution and a variety of other expenses and because vigorous avoidance techniques have eroded the definition of taxable wealth. Daniel Hemel (New York University) and Robert Lord (Americans for Tax Fairness) posit that increased deployment of various legal mechanisms – notably GRATs (grantor retained annuity trusts), IDGTs (intentionally defective grantor trusts) and steep valuation discounts for family-controlled entities – have greatly reduced taxable estates, even as households’ net worth has grown substantially.

Setting the Stage for Reform

As America prepares for an unprecedented transfer of wealth between generations, the current approach to transfer taxation appears increasingly inadequate. Reforms could help address rising inequality while raising needed revenue – all while bringing U.S. practice more in line with international norms.

The key is striking the right balance between the competing priorities of raising revenue, promoting equity, minimizing the impact on economic efficiency and ensuring that family businesses can transition smoothly between generations. We are convinced that with careful design, a reformed transfer tax system could better serve these sometimes-conflicting goals while remaining administratively feasible and politically sustainable.

Start with an easy one. One persistent political concern about transfer taxation involves its impact on family businesses and farms. As an economic matter, these worries appear largely overblown. Current law already provides substantial protection, allowing qualifying businesses to pay estate taxes over 14 years with favorable interest rates on deferred liability. Equally to the point, very few farms or businesses are large enough to trigger estate tax liability in the first place. And good business practice would suggest that owners planning for their enterprise’s survival across generations have options for buffering the impact – for example, carrying life insurance. Yet they typically don’t, suggesting liquidity or family succession issues may be less pressing than often claimed.

Three Paths Forward

Three ways to reform the taxation of wealth transfers come to mind. First, we could restore the estate tax to something closer to its historical 20th-century role. Second, we could switch to an inheritance tax, which levies taxes on what each heir receives rather than on the decedent’s overall wealth. Third, and not mutually exclusive from the first two options, we could change the tax treatment of capital gains at death.

Strengthening the estate tax by reducing the exemption could bolster revenues but it would be crucial also to address the avoidance techniques that have caused experts to label the estate tax essentially a “voluntary tax.”

Converting the estate tax to an inheritance tax has much to offer. It would close a major loophole in the income tax by bringing currently untaxed inherited income into the tax base, both raising revenue and making the overall tax system more progressive. And here’s an often-ignored bonus: it might also face less political resistance than the estate tax, as surveys suggest Americans find it fairer to tax large inheritances than to tax estates. It seems more reasonable to many people to tax the inheritance that Paris Hilton receives than the wealth that her family created.

Converting to an inheritance tax would also bring the United States more in line with other advanced economies. Of the 36 OECD countries, only four (Denmark, South Korea, the United States and the United Kingdom) tax estates. Meanwhile, 20 countries tax inheritances, typically with rates that vary based on both the size of the inheritance and the recipient’s relationship to the deceased. The U.S. currently also stands out for its extremely high exemption level on intergenerational transfers. While Italy exempts inheritances up to about $1 million (and Spain’s exemption is just $17,000), America’s $13.99 million estate tax exemption puts it in a league of its own.

The third option is to tackle the “Angel of Death” loophole in our capital gains tax system. Currently, when someone inherits an asset, its cost basis is “stepped up” to its value at the date of the deceased’s demise – meaning that all the capital gains accrued during the deceased’s lifetime escape income taxation entirely. One alternative would be to treat death as a moment when capital gains taxes come due, as Canada does. Note that the failure to tax capital gains at death creates incentives to hold onto assets until death, part of the so-called “lock in” effect that reduces the mobility of assets and undermines economic efficiency as well as sharply reducing government revenues.

Yet another alternative would be to require heirs to use the original cost basis of an asset at the time of acquisition by the deceased when they eventually do sell inherited assets. The latter approach is called “basis carryover” and is hardly alien to American tax practices: it’s how gifts (transfers between living perThe failure to tax capital gains at death creates incentives to hold assets until death, part of the “lock in” effect that reduces mobility of assets and undermines economic efficiency as well as reducing government revenues. wealth transfer Third Quarter 2025 21 sons) are currently treated in the tax code.

A common but specious complaint against this option is that it is hard to keep track of all the expenses associated with assets that generate capital gains – would a decedent’s estate have to list the cost of every stamp purchased as part of a collection? A simple solution to this problem would be to establish a “default basis”: if you have held the asset for so long that the costs are hard to recall, the government will give you a basis of, say, 10 percent of the price at which the asset sells. If you can prove the cost basis is higher, fine, but if not, you get 10 percent.

Numbers, Numbers

The qualitative impact of alternative estate policy changes may be intuitive, but understanding the quantitative impact is critical, especially when balancing multiple goals. We have developed a new method to estimate the level and distribution of bequests and inheritances, which we outline here.

Inheritances received are directly observed by households in the Survey of Consumer Finances, a triennial wealth survey sponsored by the Federal Reserve Board that is widely considered to contain the most detailed and accurate wealth data in the U.S. We construct estimates of bequests, based on estimates of household wealth from the SCF, estimates of differential mortality risk (with respect to income), estimates of estate tax deductions from the IRS’s Statistics of Income data, and estimates of estate tax liability from our own calculations.

There is nothing in the model or method requiring that simulated bequests closely approximate respondent-reported inheritances. But the two series are reasonably close in aggregate and have broadly similar size distribution, which we take as validation of the new methodology.

By linking bequests and inheritances, we are able to analyze the distributional impact of wealth transfer taxes assuming they are borne either by decedents or inheritors. In our work, we follow much recent research in analyzing all policy options assuming that heirs bear the burden of the tax. We rank households by expanded income (EI), a broad measure of income we have developed elsewhere. EI includes all major forms of cash and non-cash income, including estimates of unrealized capital gains, imputed income from owner-occupied housing, unreported business income, and inheritances received.

Who Would Pay What

Our analysis focused on three main options, each designed to raise the same amount of revenue as the current estate tax (about $19 billion in 2021):

• A 37 percent inheritance tax (matching the top income tax rate) with an exemption of $2.81 million
• A 15 percent inheritance tax with a lower exemption of $940,000
• A 23.8 percent tax on unrealized capital gains at death (matching the current top capital gains rate) with an exemption of $2.22 million

Among these options, we found that the 37 percent inheritance tax proved to be the most progressive, drawing more than 75 percent of its revenue from the top 1 percent of inheritance-exclusive income earners. Close behind is the current-law estate tax, which draws nearly 60 percent of its revenue from the top 1 percent. Even the least progressive option – the tax on unrealized gains at death – has a negligible impact on the bottom 90 percent of households.

We also explored what would happen if we returned to the estate tax parameters in place in 2001 (adjusted for inflation). The results were eye-opening: this option would raise about seven times more revenue than the current system – approximately $145 billion, annually equivalent to 8.8 percent of income tax revenues. To raise this much money through an inheritance tax with a 37 percent rate, you’d need to lower the exemption to $150,000. The 15 percent inheritance tax and the tax on unrealized gains simply couldn’t generate this much revenue – they topped out at $93 billion and $59 billion, respectively, even with no exemption at all.

Regarding distributional effects, under both the 2001-style estate tax and a revenue-equivalent inheritance tax, the top 10 percent of households would still bear a greater share of the tax burden. While the lower exemptions mean that both taxes would reach further down the income distribution than their $19 billion counterparts, average tax rates for the bottom 90 percent were still less than 0.5 percent. In this case, the highest tax burden was borne by the 95th to 99th percentile of the inheritance-exclusive expanded income distribution – aggregate estate and inheritance taxes are 1.23 percent and 1.01 percent of aggregate EI, respectively, for that group.

The Cost of Can-Kicking

The coming decades present both a challenge and an opportunity. The challenge: without reform, we risk seeing the largest untaxed transfer of wealth in American history, exacerbating existing economic inequalities and stifling economic mobility. The opportunity: thoughtful reform of the U.S. wealth transfer tax system could help address fiscal needs even as it promoted greater economic mobility, efficiency and opportunity. As the nation prepares for this massive transfer of wealth from the boomer generation, getting these policies right will be increasingly important.

Our research suggests that such reforms are both technically feasible and potentially quite effective and could take any of a variety of forms. Simply returning the estate tax to its historical parameters would increase revenue by a whopping factor of seven. Converting the current estate tax to an inheritance tax could achieve multiple policy goals, among them raising more revenue, closing a major loophole and increasing progressivity and economic mobility – all while making an end run around visceral opposition to a “death tax,” which partly explained the broad public support for gutting the estate tax back in 2001. Alternatively, addressing the current treatment of unrealized capital gains with a tax on gains at death would also help ensure that large accumulations of wealth don’t escape taxation entirely as they are passed down through generations.

The multi-trillion-dollar question, of course, is whether any revenue-raising change in the federal tax code that is highly progressive could successfully run the Washington gauntlet with the White House and both houses of Congress controlled by fiercely antitax conservatives. It certainly seems a longshot. But the politics may change if and when Washington acknowledges that it is trapped between rising deficits that put pressure on inflation and interest rates on the one hand, and the reality that, without increased revenues, entitlement transfers that hundreds of millions of Americans depend on will have to take a hit. Then the question may well morph from whether a new tax on intergenerational wealth transfers is politically palatable to whether such a tax is more palatable than the alternatives.