New Tax Law Changes Bring Tax Planning Certainty

With the enactment of the One Big Beautiful Bill Act (OBBBA), tax planning and advisors now have more certainty in the estate tax planning landscape. Prior to the OBBBA being signed into law, the question was whether the estate and gift tax exemption of $13.99 million would be extended, or be subject to sunset at year end. Along with extending the current marginal income tax rates, the OBBBA sets the estate and gift tax exemption at $15 million beginning in 2026, with the amount increasing thereafter each year, based on inflation. Over the last two decades, the estate tax exemption has grown substantially, from an exemption amount of $1 million in 2002 to $5 million in 2011 (retroactive to 2010), and to $10 million in 2018, indexed to inflation (currently $13.99 million) with an anticipated sunset on December 31, 2025 to $ 5 million indexed to inflation. Given this higher exemption amount, we recommend clients review their current estate plans and assess whether the planning that was previously done still meets their planning goals.

What does this mean for estate planning clients? 

1. Trust and Funding Clause Review. Many estate plans from the 1990s and early 2000s contain a funding clause which is known as an A/B Trust, or credit shelter trust planning. These funding clauses often maximize a couple’s estate tax exemption by providing that on the death of the first spouse, the deceased spouse’s share of the trust property, up to the estate tax exemption amount, will pass to an irrevocable trust known as a credit shelter trust. While the benefits of these trusts offer estate tax reduction, bloodline protection, and a degree of asset protection, the tradeoff to these benefits is that there is no second basis adjustment for capital gains purposes at the death of the surviving spouse. 
2. Alaska Community Property. The higher estate tax exemption found in the OBBBA makes the integration of Alaska Community Property into your estate planning that much more important. Community Property allows a surviving spouse to receive a full adjustment in basis for capital gains tax purposes at the death of the first spouse for appreciated assets, such as stock accounts and real estate. The default rule of joint ownership without Community Property is that the spouse receives a one-half step-up.  On the death of the surviving spouse, heirs will then receive an additional basis adjustment. Alaska is an opt-in Community Property state, which means that married couples can only receive this benefit by proactively entering into the Alaska Community Property regime, whether by Community Property Agreement or a Community Property Trust. However, to receive this step-up in basis at the death of the surviving spouse, the property must be includible in the surviving spouse’s estate. Unfortunately, the provision for the creation of the traditional A/B trust on the death of the first spouse creates an irrevocable trust designed to be outside of the taxable estate of the surviving spouse. One tradeoff is that these A/B trusts will not receive a second basis adjustment. Therefore, married clients with joint estate plans need to review both their trust and their Community Property Agreements to determine if their estate plan still works in the current estate tax environment. 
3. Lifetime Gifting. The current exemption is known as the unified credit of the gift and estate tax exemption, which means that starting in 2026, this $15 million exemption applies to both lifetime gifts, and transfers after death, and that the lifetime gifts reduce the available exemption amount at death. For example, if you gift a house valued at $500,000 to a child, and you then pass away after 2026, your remaining exemption would be approximately $14.5 million, indexed to inflation. This $500,000 gift would be reported on a gift tax return. The power of lifetime gifts in this high estate and gift tax environment should not be overlooked. However, one downside to lifetime gifting is that the donee of the gift receives the donor’s basis. Therefore, it is worth evaluating what mix of assets makes the most sense when gifting to children, family, and friends. The annual gifting exemption, i.e. the amount that can be gifted without reporting the transaction to the IRS, is still $19,000, indexed to inflation. This annual gifting exemption was not impacted by the OBBBA.
4. Portability. For married couples, the increased estate tax exemption amount means that many more clients will opt to treat property as a part of their taxable estat, since because their net worth does not exceed this exemption amount. Portability provides married couples with an additional planning tool, allowing the surviving spouse to carry over the deceased spouse’s exemption by properly filing an IRS Form 706 Estate Tax Return. This means that starting in 2026, married couples can protect up to $30 million of their net worth, while allowing their heirs to receive a basis adjustment both on the death of the first spouse, and again on the death of the surviving spouse. 
5. Other Planning Tools. For clients who still want bloodline protection for heirs or creditor protection, a Marital QTIP Trust may be an option. This trust provides income to the spouse, while limiting principal distributions to the standard established in the Trust. Typically used to defer estate taxation, coupled with a portability election and spendthrift provision, these trusts provide powerful planning tools for surviving spouses and heirs. The most significate tradeoff for this planning tool is the requirement that a 706 Estate Tax Return be filed within nine months of the death of the first spouse.

As most clients know, estate planning is a multifaceted process, with tax planning often integrated into the conversation. This process can change over time due to changes in the law and each client’s individual needs. While the new tax law provides more certainty, any law may be changed by a future administration. To that end, we recommend periodically reviewing your estate planning. If you have questions about how the OBBBA affects your planning, we encourage you to contact our office to schedule a trust review.