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Understanding the Estate and Gift Tax Changes Under the One Big Beautiful Bill Act
The One Big Beautiful Bill Act (OBBBA) recently introduced substantial changes in the realm of estate and gift tax planning. These changes present new opportunities for taxpayers. The legislation modifies critical aspects of the estate tax exclusion, making long-term planning both more urgent and more strategic for affluent taxpayers.
Basics of the Estate and Gift Tax Exclusion: The estate and gift tax exclusion is the amount that can be excluded from federal estate tax. If the value of a decedent’s estate is less than the exclusion amount for the year of death ($13.99 million in 2025), no federal estate tax is owed and no estate tax return is required, but in some cases filing an estate tax return may still be prudent (see Benefits of the Portability Election below).
If the value of gifts one individual gives to another person during a year is greater than that year’s annual gift tax exclusion ($19,000 for 2025), the individual making the gift must file a gift tax return (IRS Form 709), but often will owe no gift tax. This is because the gift giver can dip into their combined lifetime estate and gift tax exclusion and apply it to the excess gift amount. When the individual passes away, a reconciliation must be done to see if the combination of excess gifts and the value of the individual’s estate exceeds the lifetime estate and gift tax exclusion, which varies from year to year. This is done on IRS Form 706.
Estate and Gift Tax Exclusions: Key Adjustments: The OBBBA has effectively "permanently" set the estate and gift tax exclusion at $15 million per individual starting in 2026, adjusted for inflation in the following years. This decision is a continuation of the trend initiated by the Tax Cuts and Jobs Act of 2017 (TCJA), which doubled the previous $5 million exclusion to $10 million, again indexed for inflation, but only through 2025. Prior to the OBBBA, the expectation was that this exclusion would drop significantly to about $7 million, essentially rolling back to the pre-TCJA levels, adjusted for inflation. However, with the OBBBA's intervention, a more favorable scenario for high-net-worth individuals has been preserved.
This adjustment helps taxpayers engage in more precise planning for their estates, allowing them to pass on more wealth without triggering tax obligations. It offers a level of stability and predictability that can be pivotal in both long-term estate planning and immediate asset management strategies.
Impact on Generation-Skipping Transfers: In tandem with the estate and gift tax exclusions, the Generation-Skipping Transfer (GST) tax exclusion has also been aligned. The GST tax is a federal tax levied on transfers that skip a generation, such as from grandparents directly to grandchildren, bypassing the parents. Under OBBBA, the GST exclusion mirrors the estate and gift tax exclusion, set at $15 million from 2026 and indexed thereafter. This move curbs the potential tax-free transfer across generations, ensuring that wealth passed in such a manner is adequately taxed while still allowing for strategic planning opportunities to mitigate tax exposure.
Benefits of the Portability Election: An often-overlooked strategy for married couples in estate planning involves the portability election, which can be particularly beneficial upon the death of the first spouse. This election allows the surviving spouse to utilize any unused portion of the deceased spouse’s estate and gift tax exclusion. By leveraging this mechanism, couples can effectively maximize the tax exclusions available to them.
For example, if the estate of a spouse who dies in 2026 does not use their full $15 million exclusion, the remainder can transfer to the surviving spouse's exclusion, potentially doubling the couple’s tax-free transfer capability. This process can significantly alleviate the financial burden on the surviving spouse and provide more flexibility and security in managing and distributing their estate as desired. It is an essential tool in a comprehensive estate planning strategy, particularly under the current tax environment shaped by the OBBBA.
To take advantage of this election, the executor of the estate of the first spouse to die must file a timely Form 706, even if there is no estate tax owed.
Strategic Implications for Wealth Management: The changes introduced by the OBBBA necessitate a fresh look at existing estate plans. Taxpayers who had previously braced themselves for a reversion to lower exclusion thresholds now have the opportunity to further leverage the increased exclusions in their planning strategies. This means reevaluating current plans to make the most of the permanent $15 million exclusion cap, aligning it with long-term financial goals and family wealth aspirations.
For estate planning professionals, the OBBBA offers both a challenge and an opportunity. The permanence of these provisions requires planners to incorporate them into dynamic and flexible estate plans that can withstand the test of inflation, economic fluctuations, and potential future legislative changes. Deploying gifts, trusts, and other tools efficiently will be critical in optimizing these tax benefits.
Conclusion: The estate and gift tax landscape, shaped by the One Big Beautiful Bill Act, presents complex but rewarding planning opportunities. With increased exclusions, aligned GST provisions, and the beneficial portability election, taxpayers and estate planners can navigate these waters effectively to ensure wealth preservation across generations. As such, now is an ideal time for affluent individuals to consult with their tax advisors and estate planners to reassess and optimize their strategies.
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