Estate and Gift Tax Planning under the Reconciliation Bill H.R.I: New Opportunities and Ongoing Considerations

The passage of the Reconciliation Bill H.R.I, marks a significant shift in the landscape of federal estate and gift tax planning.  Given the permanent increase in the exclusion amount and the continued availability of essential planning techniques, high-net-worth individuals and their advisors should reevaluate their estate and gift strategies to optimize advantages while considering both federal and state implications.

Permanent Basic Exclusion Amount

The OBBBA permanently raises the federal estate, gift, and generation-skipping transfer (GST) tax exclusion amount to $15 million per individual, effective for transfers after December 31, 2025.  This amount will be indexed for inflation in future years, eliminating the prior sunset provision that would have reduced the exclusion after 2025.  The law also maintains the portability provision, allowing a surviving spouse to use any unused exclusion from a predeceased spouse, effectively doubling the exclusion for married couples who properly plan. 

DSUE: Portability and Planning Opportunities

The Deceased Spousal Unused Exclusion (DSUE) rules remain unchanged under the OBBBA. The DSUE is fixed at the decedent’s death and is not adjusted for inflation, but the higher exclusion applies for decedents dying after 2025. The executor must elect portability by timely filing Form 706, even for estates below the filing threshold. This election preserves the unused exclusion for the surviving spouse, who can use it for lifetime gifts or at death. While portability is a powerful tool, traditional bypass trusts may still be valuable for non-tax reasons, such as asset protection, control, and state estate tax planning.

Lifetime Gifting Strategies: Maximizing the New Exclusion

The OBBBA’s increased exclusion creates a unique window for high-net-worth individuals to transfer significant wealth tax-free. Key strategies include:

• Maximizing Use of the Exclusion: Consider making large gifts to lock in the higher exclusion, especially if future legislation could reduce it.
• Leveraging Portability: Married couples can effectively transfer up to $30 million tax-free with proper planning.
•  Removing Future Appreciation: Gifting appreciating assets now removes both current value and future appreciation from the taxable estate.
• Annual Exclusion Gifts: Continue to use the annual exclusion ($19,000 per done in 2025) and gift-splitting for additional tax-free transfers.
• State Estate Tax Planning: In states with lower exemptions, gifting the “gap” amount above the state threshold but below the federal exclusion can avoid state death taxes.
• Trust Planning: Use irrevocable trusts (e.g., grantor trusts, SLATs, ILITs) for asset protection, control, and leveraging the increased exclusion.
• GST Planning: The increased GST exemption allows for larger, tax-free multigenerational transfers.
• Charitable Gifting: Lifetime charitable gifts can generate income tax deductions and remove assets from the estate.

Anti-clawback regulations ensure that gifts made under the higher exclusion will not be “clawed back” into the estate if the exclusion is later reduced, provided the gifts are true inter vivos transfers.

Transition Planning: Reviewing and Adjusting Prior Strategies

With the exclusion increasing in 2026, the urgency to make large gifts before year-end is reduced. Key transition planning steps include:

• Review Existing Gifting Plans: Assess whether additional gifts are warranted or if the new higher exclusion changes the strategy.
• Reassess Trust Structures: Evaluate whether existing irrevocable trusts are still optimal, especially if they were created primarily for exclusion “use-it-or-lose-it” reasons.
• Basis Step-Up Planning: For clients unlikely to be subject to estate tax, holding appreciated assets until death may be preferable to secure a step-up in basis.
• Unwinding Prior Structures: Consider whether to decant, terminate, or modify trusts that may no longer be necessary or optimal.
• Continue Annual Exclusion and Direct Payment Strategies: These remain effective tools for wealth transfer.

Why Estate Planning Still Matters: State Taxes and Non-Tax Reasons

Despite the increased federal exclusion, estate planning remains essential for several reasons:

• State Estate and Inheritance Taxes: Many states impose estate or inheritance taxes with much lower exemption amounts—sometimes as low as $1 million. Clients may still face significant state-level taxes even if they are exempt from federal estate tax.
• Non-Tax Reasons: Estate planning ensures assets pass to intended beneficiaries, protects assets from creditors, provides for minor children or dependents, and addresses family dynamics. It also ensures that financial and healthcare powers of attorney, advance medical directives, and other critical documents are up to date.
• Need to Review and Update Prior Plans: Changes in federal law, state law, family circumstances, or financial situations can all trigger the need to review and update estate plans. Plans designed to minimize federal estate tax under a lower exclusion may now be unnecessarily complex or may not optimize for state tax or income tax basis planning.

Conclusion

The OBBBA’s permanent increase in the federal estate and gift tax exclusion to $15 million per individual opens new opportunities for high-net-worth clients but also requires a thoughtful review of existing plans. Advisors should help clients maximize the benefits of the new law, address state-level and non-tax concerns, and ensure that estate plans remain aligned with their goals and the evolving legal landscape. Regular review and proactive adjustment are essential to effective estate and gift tax planning in this new era.

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