The recent enactment of H.R. 1, commonly known as the “One Big Beautiful Bill Act,” or the “Act,” which has been signed into law, includes a critical provision that permanently and significantly increases the federal estate and gift tax exemption amounts. This will have a profound impact on wealth transfer strategies and may require the review and updating of existing estate plans.
For years, families and their advisors have navigated the complexities of fluctuating tax laws, often planning around temporary provisions and sunset clauses. This new law provides a welcome measure of certainty and offers opportunities for high-net-worth families and owners of closely held businesses to refine their legacy plans.
The Game-Changer: A Permanent Increase in Exemption
The most impactful change for estate planning comes from Section 70106 of the Act, which directly addresses Section 2010(c)(3) of the Internal Revenue Code, the section that sets the federal estate and gift tax exemption.
Prior to the Act’s enactment, the basic exclusion amount for federal estate and gift tax purposes was set to revert to $5 million per person (which, indexed for inflation, would have been approximately $7 million) at the end of 2025, following the expiration of the temporary doubling of the exemption amount enacted by the Tax Cuts and Jobs Act of 2017. This looming “sunset” created significant uncertainty and often drove planning discussions.
However, under the Act, the federal estate and gift tax exemption is now permanently increased to $15 million per person, effective for estates of decedents dying and gifts made after December 31, 2025. This substantial $15 million figure will also be indexed for inflation from calendar year 2025 forward, meaning it will continue to grow over time.
To put this into perspective, a married couple will now be able to transfer approximately $30 million (plus inflation adjustments) free of federal estate and gift taxes. This is a monumental shift that demands a fresh look at your existing strategies and opens new avenues for future planning.
For New Estate Plans: A Shift in Focus
If you are just beginning to formalize your estate plan, this law offers a clearer path forward. While federal estate tax remains a consideration for the very largest estates, many families will find themselves comfortably below the new, higher exemption thresholds. This allows a shift in focus from solely minimizing federal estate tax to addressing other objectives:
- Asset Protection: Protecting your hard-earned assets from potential threats such as creditors, lawsuits, or divorce remains paramount. Strategic use of trusts and other entities can safeguard wealth for future generations.
- Business Succession Planning: For owners of closely held businesses, this is often the most complex and vital aspect of estate planning. The new law reinforces the need for succession strategies that ensure a smooth transition of leadership and ownership, preserve business value, and provide liquidity for your family without forcing a sale of the enterprise in order to pay estate taxes. Focus can now be placed more heavily on operational continuity and leadership development.
- Income Tax Planning: With less emphasis on estate tax, the focus on income tax efficiency becomes even more important. Assets that remain in your estate will generally receive a “step-up in basis” at death. This means the cost basis of those assets (for capital gains tax purposes) is adjusted to their fair market value on the date of death. This can significantly reduce or eliminate capital gains taxes for your heirs when they eventually sell those assets. This is a powerful benefit that can now be leveraged more broadly.
- State-Level Taxes: It’s crucial to remember that this federal law does not impact state-level estate or inheritance taxes. Many states have their own transfer taxes that apply at much lower thresholds than the federal exemption. For example, New Jersey’s inheritance tax is imposed on bequests to individuals who are not a spouse, direct ancestor, or direct descendant of the decedent; this tax may kick in at bequests as little as $500 and can range anywhere from 11-16% of the bequest.
For Existing Estate Plans: A Critical Review is Imperative
If you already have an estate plan in place, now is a good time to review it. Your existing documents may contain “formula clauses” designed to minimize estate taxes under previous laws. These clauses often direct assets to specific trusts (like “credit shelter” or “bypass” trusts) based on the federal estate tax exemption amount in effect at the time of your death.
With the new, significantly higher exemption, these formulas could lead to unintended consequences, such as:
- Overfunding of Trusts: A trust designed to receive “the maximum amount that can pass free of estate tax” might now receive a much larger portion of your estate than originally intended (or all of your estate), potentially disinheriting other beneficiaries or creating liquidity issues.
- Unintended Beneficiaries: Assets might be allocated to certain family members, leaving less than you had desired for others.
- Income Tax Inefficiencies: Assets passing into certain trusts might not receive the full “step-up in basis” at death, leading to higher capital gains taxes for your heirs down the line.
Furthermore, your existing gifting strategies should be re-evaluated. The increased gift tax exemption allows you to make larger lifetime gifts without incurring gift tax or using up all of your estate tax exemption. For individuals who have already used a significant portion (or all) of their lifetime exemption amount, the increased exemption also gives them more that can be applied to additional lifetime gifts. Gifting can be an effective way to remove appreciating assets from your taxable estate, benefiting your heirs and potentially reducing future transfer tax exposure, at the federal and/or state level.
For All Clients:
- Quantify Your Current Net Worth: A clear understanding of your assets and liabilities is the first step. This will help determine how the new exemption directly applies to your situation.
- Revisit Your Core Goals: Has your family dynamic changed? Are your philanthropic aspirations the same? Have your business growth plans evolved? Your estate plan should be a living document that reflects your current stage of life.
- Prioritize Non-Tax Planning: Even if federal estate tax is no longer a primary concern, issues like asset protection, long-term care planning, digital asset management, and clear directives for incapacity remain vital.
For Business Owners:
- Strengthen Your Succession Plan: This is an opportune time to solidify who will lead and own your business when you’re no longer at the helm. This includes considering buy-sell agreements, management transitions, and how to value and transfer ownership interests efficiently.
- Liquidity Planning: Even without federal estate tax, liquidity may still be needed for state taxes, business operations, or to equalize inheritances among family members.
- Valuation Strategies: Accurate business valuation is crucial for all transfer purposes, whether by gift or at death.
Conclusion:
The permanent increase in the federal estate and gift tax exemption is a significant and positive development. It offers a chance to simplify certain aspects of your planning while allowing more strategic attention to your unique family dynamics, business continuity, and long-term legacy.