News, Articles & Resources

On July 4, 2025, President Trump signed the extensive tax changes referred to as “One Big Beautiful Bill” Act (“OBBBA”).  One of the major provisions will impact estate planning as we have known it.  The OBBBA has extended the 2017 Tax Cut and Jobs Act provisions which were set to expire at the end of 2025. As a result, a significant estate planning provision, which was set to be reduced in half on January 1, 2026, will continue.  This law will now exempt from estate and gift tax transfers of $15 million dollars, effective January 1, 2026, and thereafter indexed for inflation each year. Without this provision, the exemption would have been around $7 million dollars. Moreover, not only has the OBBBA retained 2017 law, but also, by using a technical loophole, it did so in a “permanent” manner.  It is not scheduled to expire in a few years, unlike several other tax law provisions under the OBBBA. However, a tax law is only “permanent,” as long as it is not changed in the future.

From a historical perspective, over the course of this author’s 40-year career, there have been incredible increases in the amounts of wealth that can pass estate tax free.  When an individual passes away, their wealth (their “taxable estate,” meaning all assets which they own or control) will be subject to an estate tax unless one of three tests is met.  First, property can pass estate tax free to a charity. Second, property can pass estate tax free to a spouse (assuming the surviving spouse is a United States citizen). Third, property can pass estate tax free to the extent that the property, when combined with lifetime gifts made by the individual, is less than a certain threshold, once known as the “unified credit” (it being “unified” because it includes both lifetime transfers subject to gift tax, and testamentary transfers subject to estate tax), but now known as the Basic Exclusion Amount (the “BEA”)[1].  The effect of this BEA is that the estate tax will only apply when an individual’s wealth is significant, exceeding the BEA.  When this author began practicing in the 1980s, the “exemption” was about $60,000 and it was increased by President Reagan’s Economic Recovery Tax Act of 1981 to an amount which seemed significant at the time, $600,000. Now the OBBBA provisions increase the exemption to the sum of $15,000,000!  As a result, only the extremely affluent are subject to its provisions.

When an individual’s wealth does exceed the BEA, a tax is imposed on the excess value at a rate of 40%.  Historically, before 2012, there were graduated tax brackets leading up to as high as 55%.  However, recently, the tax rate on wealth has been fixed at a flat rate of 40%.  These recent changes to the estate and gift tax exemption threshold allow for more significant transfers of wealth, with less tax being due.

According to Kiplinger and Forbes, net worth of between $11,000,000 and $13,000,000 places an individual in the top 1% of all Americans.  Moreover, a 2024 Schwab survey revealed that Americans believe that it takes $2,500,000 in net worth to be considered “wealthy.”  Thus, the estate tax will only apply to those individuals that many Americans believe have a net worth six times the amount necessary to be “wealthy.”

So, with the new “permanent” estate tax BEA being set beyond the wealth of many individuals, how should one consider changes to their testamentary estate plan in a Will or trust?  Long ago, the band Blood, sweat & tears taught us “what goes up, must come down, spinners wheel, got to go round.”[2] Yet, some in the estate planning community feel that having enacted a high exemption, it will be hard for future Congresses to impose a reduction to the exemption. Still, some others feel that the state of the national debt may cause future legislators to look for other sources of revenue, like estate tax.

Unfortunately, unlike income taxes which are calculated annually, estate taxes are not fixed until the year an individual passes away.  Thus, unless you pass away at a time when the federal estate tax exemption is at a threshold above the value of your wealth, you can never be certain whether an estate tax may be imposed.  Moreover, the last time an estate tax threshold was set “permanently” in 2012, that “permanent” rule was changed in 2017 by doubling the exemption.  In other words, experience shows that “permanent” means five years!  While one might surmise that the 2025 changes should survive at least until 2030, for many, if not most individuals, ignoring the potential for estate tax ramifications may be premature.  Most of us hope to live well beyond 2030, 2040, 2050 or beyond.  Thus, estate tax ramifications remain unsettled.

Another aspect to the recent change in the BEA by OBBBA is that there is another separately stated tax “exemption” designed to maximize the application of the estate tax on large transfers.  This concept is contained in federal tax rules and is called the “Generation-Skipping Transfer” (GST) tax.  These rules provide that if assets are left in trust for the benefit of family over multiple generations, a tax, which is intended to be a substitute for an estate tax at each generational level, is imposed. This GST tax is imposed as if the estate tax would have been imposed at the death of the generation below the donor when funds effectively pass to the “grandchildren” beneficiary class.  Like the BEA, the Generation Skipping Transfer tax exemption amount was increased to $15,000,000 per individual beginning in 2026.  This “GST exemption” will allow an individual to leave assets in trust for the benefit of a child, leaving them with substantial powers and rights to access the funds, yet removing the inherited assets from the estate tax base upon the death of the child.

For New Jersey residents, there is also the potential exposure to state taxes.  New Jersey has always had, and continues to have, a New Jersey inheritance tax. For most families, this tax is not a factor since there are exemptions for transfers to a spouse, child, grandchild or stepchild (so called “Class A” beneficiaries).  New Jersey used to have a separate free standing estate tax which would apply at an individual’s passing.  The New Jersey estate tax was repealed effective January 1, 2018.  As we know, our state already imposes high income taxes, high sales taxes and high property taxes, thus, should the need arise, a change in the estate tax is not unforeseeable.   For our New Jersey clients, we may need to suggest that they consider there is also always the possibility that New Jersey may reinstitute an estate tax.

Complicating planning even more is the coordination of the income tax with the estate and gift tax. There is a beneficial effect of inheriting some assets from a decedent, known as the “step-up” in tax basis. As background, when someone sells an investment, the taxable gain is usually determined by deducting from the sales proceeds received the amount initially paid for the investment, called tax “basis.” [3] The difference is the gain (or loss), on which income tax is then paid. At the owner’s death, if he/she still owns the investment, this “basis” is adjusted (or “stepped up”) to the fair market value of the investment as of the owner’s date of death, allowing the heirs to sell the investment without the imposition of the income tax that would have been due to the decedent. Unfortunately, this beneficial rule does not apply for tax-qualified retirement funds (IRAs, 401ks, 403bs). Nevertheless, given the large estate tax exemption amount, much of current estate planning will now focus more on income-tax saving strategies, rather than estate tax.

In sum, while the increase in the estate tax exemption is a significant and welcome development for wealthy families, some prudent residents may continue to take appropriate steps to plan for potential estate tax as part of their long-range strategy. While these developments may make tax planning easier for some, it also may make the planning options more complex for others.

[1] For a brief period of time, it was called the “applicable exclusion amount.”

[2] Spinners Wheel, by David Clayton-Thomas, EMI Blackwood Music, Inc. Bay Music Ltd, (1968).

[3] In some cases, like investment real estate, tax “basis” is reduced by depreciation deductions allowed to the owner.