Estate Planning after the One Big Beautiful Bill Act (OBBBA)

Over the last decades, the focus of estate planning has been to minimize the federal estate tax.  The estate tax rate has varied from 70% down to 35%, but has always been a significant amount to avoid.  In an era where the federal estate tax was 40% or 50%, and the capital gains rate was 20% to 28%, the savings of federal estate taxes always over-rode the tax basis step-up objective.  But now we have a big tax law change and we should consider how these changes affect our planning.

With estate planning, the OBBBA could have a substantial effect on the structure of our wills.  By increasing the estate tax exemption to $15M beginning in 2026 ($30M for a married couple), very few families will be exposed to the federal death tax.  Sure, there will still be ultra-high net worth families that should pursue many available remedies to lower their estate tax exposure. However, with so many estates now being non-taxable, the focus has changed to income tax matters versus estate tax matters.

A decedent’s estate achieves a step-up in income tax basis to fair market value at the decedent’s date of death for all assets in the estate (an exception to this rule would be a decedent’s IRA).  It may be better for the decedent to have died with the asset in his or her estate rather than having gifted the asset away prior to death.

Let’s take a simple example of a widow’s home.  She may ask, “should I gift my home to my children while I am alive?” The answer is a resounding “no”, because her children can inherit the home at their mother’s death with a brand-new income tax basis equal to the property’s fair market value at that time.  Thereafter, they can sell the property with minimal capital gain.

The same logic would hold true for stocks and bonds, family businesses, the family farm, etc.  For those taxpayers whose estate will not be exposed to federal estate tax, a goal may be to pass those assets from one generation to the next with as high an income tax basis as possible.

Many married taxpayers have wills that create residuary trusts or credit shelter trusts for the surviving spouse.  Married couples with medium high net worth estates and smaller (under $30M) should review their wills and likely eliminate or modify the trust that will be created for the surviving spouse.  Trusts may remain a valuable tool in your estate planning architecture for tax reasons, asset protection or control, but the emphasis on eliminating federal estate tax has changed.

It is time to sit down with your advisors and review your estate planning architecture, as many wills need to be revised in light of the One Big Beautiful Bill Act!