Article Highlights:
- Basics of the Estate and Gift Tax Exclusion
- Estate and Gift Tax Exclusions: Key Adjustments
- Impact on Generation-Skipping Transfers
- Benefits of the Portability Election
- Strategic Implications for Wealth Management
The One Big Beautiful Bill Act (OBBBA) recently made significant modifications to inheritance and gift tax planning. These changes create new options for taxpayers. The Act changes key parts of the estate tax exception, making long-term planning more important and strategic for wealthy taxpayers.
The estate and gift tax exclusion is the amount that is exempt from federal estate taxes. 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; however, filing an estate tax return may still be prudent in some cases (see Benefits of the Portability Election below).
If the value of gifts given to another person during a year exceeds that year's annual gift tax exclusion ($19,000 in 2025), the individual making the gift must submit a gift tax return (IRS Form 709), although they may owe no gift tax. This is because the gift giver can use their combined lifetime estate and gift tax exclusion to cover the extra gift amount. When the individual dies, a reconciliation must be performed to determine if the sum of excess gifts and the amount of the individual's estate exceeds the lifetime estate and gift tax exclusion, which fluctuates each year. This is done on the IRS Form 706.
Estate and Gift Tax Exclusions: Key Changes: The OBBBA has effectively "permanently" established the estate and gift tax exclusion at $15 million per individual beginning in 2026, with adjustments for inflation in subsequent years. This ruling continues the trend started by the Tax Cuts and Jobs Act of 2017 (TCJA), which quadrupled the previous $5 million exclusion to $10 million, adjusted for inflation but only until 2025. Prior to the OBBBA, it was expected that this exclusion would fall dramatically to around $7 million, effectively returning to pre-TCJA levels, adjusted for inflation. However, thanks to the OBBBA's intervention, a more advantageous scenario for high-net-worth persons has been maintained.
This modification enables taxpayers to arrange their estates more precisely, allowing them to pass on greater wealth without incurring tax liabilities. It provides stability and predictability, which can be important in both long-term estate planning and immediate asset management techniques.
Impact on Generation-Skipping Transfers: In addition to the estate and gift tax exclusions, the GST tax exclusion has been aligned. The GST tax is a federal tax charged on transfers that skip generations, such as those made directly from grandparents to grandchildren, bypassing the parents. Under OBBBA, the GST exception mirrors the estate and gift tax exclusion, which is set at $15 million in 2026 and adjusted thereafter. This action limits the opportunity for tax-free transfers across generations, ensuring that wealth distributed in this manner is properly taxed while yet allowing for strategic planning options to reduce tax exposure.
Benefits of the Portability Election: The portability election is an often-overlooked estate planning option for married couples, and it can be especially useful after the death of the first spouse. This election enables the surviving spouse to use any unused amount of the deceased spouse's estate and gift tax exclusion. Couples who use this approach can efficiently maximize the tax breaks available to them.
For example, if a spouse's estate does not use the full $15 million exclusion in 2026, the remaining amount can be transferred to the surviving spouse's exclusion, potentially tripling the couple's tax-free transfer capability. This approach can greatly reduce the surviving spouse's financial burden while also providing greater flexibility and security in managing and distributing their estate as desired. It is a vital instrument in a comprehensive estate planning approach, especially given the current tax climate defined by the OBBBA.
To take advantage of this election, the executor of the first spouse's estate must file Form 706 on time, even if no estate tax is required.
Strategic Implications for Wealth Management: The OBBBA's revisions need a rethinking of current estate planning strategies. Taxpayers who had previously anticipated a return to lower exclusion criteria now have the opportunity to capitalize on the higher exclusions in their planning methods. This entails rethinking current strategies to make the most of the permanent $15 million exclusion cap, aligning them with long-term financial goals and family wealth objectives.
For estate planning specialists, the OBBBA provides both a challenge and an opportunity. Planners must incorporate these protections into dynamic and flexible estate plans that can resist inflation, economic volatility, and potential future legal changes in order for them to be permanent. Using donations, trusts, and other vehicles efficiently will be key to maximizing these tax benefits.
Conclusion: The One Big Beautiful Bill Act has changed the estate and gift tax environment, opening up complex yet profitable planning alternatives. With enhanced exclusions, aligned GST rules, and the advantageous portability election, taxpayers and estate planners may efficiently navigate these waters to ensure wealth preservation for future generations. As a result, now is an excellent moment for wealthy individuals to meet with their tax advisors and estate planners to reassess and optimize their strategies.