Effect OBBBA Has on §2010 Exemption Amount 

Section 2010 of the Internal Revenue Code provides a tax credit that offsets estate and gift tax liability. This credit translates to an “applicable exclusion amount,” which is effectively the total cumulative value of property that a taxpayer can give away tax-free during her lifetime. Before TCJA, that amount was $5 million per individual, indexed for inflation from 2010 (approximately $7 million by 2025). TCJA temporarily increased that amount to $10 million per individual (adjusted to $13.99 million for inflation as of this year); a “sunset” built into the TCJA would revert that amount to the same $5 million (indexed for inflation) starting in 2026. OBBBA has permanently increased the applicable exclusion amount to $15 million (indexed for inflation using 2025 as the base year). The increase applies to both the coupled estate and gift tax exemption and the Generation-Skipping Transfer (GST) Tax exemption. 

What This Means for You As Our Client:

OBBBA raises opportunities for both medium- and high-net wealth families alike. For individuals with net wealth greater than $15 million or couples with net wealth greater than $30 million, the increased exemption is a welcome opportunity to leverage the ability to transfer more assets to trusts and engage in further planning. Taxpayers who have already used most or all of their lifetime exemptions will welcome the breathing room to allow for a seed gift to a new trust or transfers of entire assets to existing ones. 

But the most relatively lucrative opportunities arising from the higher exemption amounts might be reserved for medium-net wealth families who fall somewhat below the $15 or $30 million net wealth thresholds. Those families would be making a mistake by believing that the OBBBA changes mean they won’t need to do any tax structuring as they plan their estate. However, the OBBBA changes mean quite the opposite: instead, those families should take a hard look at how OBBBA opens up income tax planning opportunities instead. They should then reconcile income tax planning options with state-level concerns in jurisdictions such as New York, which impose a state-level estate tax as well. For those wondering, New York’s state-level estate tax exemption, which is currently $5 million per individual and indexed for inflation using 2010 as the base year, is not pegged to the federal exemption, so the OBBBA does not change New York’s exemption level. New York also imposes a “cliff” in its state-level estate tax law, which dictates that taxable estates exceeding the exemption amount by more than 5% do not get to use the exemption at all; this punitive measure makes efficient tax planning especially important because a mild mistake or oversight could trigger over $1,000,000 of total tax liability. 

Where medium-net wealth taxpayers have the greatest opportunity is preserving the basis adjustment at death, the rules for which were completely unchanged by OBBBA. As most estate planning clients understand, Section 1014 of the Internal Revenue Code calls for all assets included in a decedent’s taxable estate to have their income tax basis adjusted to fair market value as of the date of death, effectively wiping out all built-in gains. This so-called “step-up” in basis is immensely valuable to heirs, who can then sell the inherited assets with zero or a significantly reduced taxable gain or restart the depreciation or amortization schedule to generate a fresh set of income tax deductions. 

Before OBBBA and even TCJA, planners very delicately balanced between removing assets from one’s taxable estate (and thereby rendering them ineligible for the step-up in basis) and keeping those assets in the taxable estate to allow the step-up to occur. The OBBBA’s increase of the federal exemption to $15 million per individual tips the scales significantly in favor of keeping assets within one’s taxable estate to achieve the step-up. For a substantially higher portion of American families, lifetime transfers will probably be a bad idea. 

For married couples drafting their Last Wills and Testament or Revocable Living Trusts, ensuring the surviving spouse can get a second step-up at his death will be a higher focus of estate tax planning. The use of flexible bypass trusts, formulas, and other advanced techniques will become the standard; before OBBBA, these techniques were niche and not considered absolutely essential for medium-net wealth couples. The OBBBA will change that; while fear of the onerous 40% top federal estate tax rate and 16% top New York estate tax rate will be far less of a concern for medium-net wealth families, that apprehension should be replaced by the fear of missing out on more optimal income tax consequences. 

The other technique the OBBBA’s increased exemption encourages is upstream planning. Since every person eligible for the United States federal estate and gift tax exemption now has $15 million to use, allowing a relative’s exemption to go to waste would be a major blunder. For instance, suppose a medium-net wealth couple has three living parents and one living grandparent. If each of those persons could be trusted with a general power of appointment, awarding that power to each person in a trust document could allow assets to be eligible for the step-up upon the power holder’s death, a form of “super-bequeathal” that could significantly increase a medium-net wealth family’s after-tax worth by millions of dollars. For business holdings, stock, real estate, residences, and other assets with significant built-in gain, upstream planning could be a game-changer. While there are major issues to navigate, such as asset protection (including in the Medicaid context) and avoiding the power holder’s responsibility for any estate or gift tax, the effort to plan the right way can be stupendously worthwhile. 

DISCLAIMER: This summary is not legal or tax advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.