Estate planning in a post-OBBBA world

Editor: Alexander J. Brosseau, CPA

For much of 2024, many estate planners and taxpayers stood on the edge of uncertainty. Then, a looming question was what would happen to the enhanced basic exclusion amount (BEA) that was set to sunset at the end of tax year 2025. The uncertainty began to dissipate in November 2024 after President Donald Trump won a second term in the White House and congressional Republicans secured majorities in both chambers of Congress for the next two years — the same power structure as when the Republicans enacted the 2017 Tax Cuts and Jobs Act, (TCJA), P.L. 115–97, which had originally enhanced the BEA. Questions arose: Would the enhanced exemption amount stay in place? Would it be increased? Or would a Republican–controlled Congress completely repeal the estate tax once and for all?

Definitive change arrived on July 4, 2025, when Trump signed the law commonly referred to as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119–21, which permanently set the BEA and generation–skipping transfer tax (GSTT) exemption at $15 million for transfers after Dec. 31, 2025, with adjustments for inflation thereafter.

While this permanence dispelled the immediate threat of a sunset of the enhanced BEA, it is important to remember that a future Congress could again revisit and reshape the estate tax regime. High–net–worth individuals and their advisers will need to stay agile and well informed and proceed with thoughtful, deliberate planning.

Planning considerations

Now that the BEA’s sunset is no longer imminent, individuals can advance their estate planning goals with greater confidence. Before deciding to transfer assets via gift, individuals should consider that for a transfer to be effective for transfer tax purposes, they must part with dominion and control of the assets, including all the benefits that come with those assets. Often, the long–term impact of gifting on donors’ cash flow is overlooked. Comprehensive financial modeling should be undertaken beforehand to confirm that the individual can continue to comfortably fund their lifestyle after making irrevocable gifts.

A prudent approach begins with a comprehensive wealth assessment, evaluation of ongoing cash needs, and consideration of transferring only amounts not needed to sustain the individual’s desired lifestyle. Long–term projections can help determine whether making a gift will strain resources. If concerns arise, options include reducing the size of gifts or incorporating flexible structures, such as grantor trust provisions enabling the release of grantor powers should the income tax burden become untenable. Such planning can help mitigate potential donor remorse.

Using the BEA

If an individual plans to utilize their BEA, the following strategies can be considered.

Outright taxable gifts: For those not interested in employing trusts or other complicated gifting strategies, an outright cash gift to an individual is an option. Gifts of appreciated assets are also an option. However, the estate and income tax ramifications should be considered. In the case of a gift, the donee steps into the shoes of the donor and receives the donor’s carryover basis. Thus, if there is built–in gain, the donor does not recognize gain on the transfer; however, the beneficiary will recognize gain when they dispose of it. If the appreciated asset is held until the donor’s death, the beneficiaries will receive those assets at a stepped–up basis.

Dynasty trusts: Generational wealth planning: Using a grantor–type dynasty trust rather than making gifts outright may better preserve an individual’s legacy for future generations and provide options for further wealth transfer through leveraged sale transactions. A dynasty trust is a trust established for the benefit of children and more remote descendants. All states permit dynasty trusts, but each state’s law may restrict how long they can exist. Some states have amended their trust statutes to allow trusts to exist in perpetuity, e.g., South Dakota, and individuals can create a trust in a state that is not their state of residence.

Because these trusts are intended to benefit multiple generations, they are typically designed to use an individual’s GSTT exemption. To the extent that the individual allocates GSTT exemption to the dynasty trust, the trust assets will not be subject to further gift or estate tax or GSTT until they are distributed or the trust terminates. For this reason, dynasty trusts can be effective transfer tax tools.

Rainy-day trusts

Now that the enhanced BEA does not have a scheduled sunset, individuals not otherwise prepared to make an irrevocable gift who are considering “rainy–day trusts” should evaluate whether they should proceed with such a plan. An example of a common rainy–day trust is a spousal lifetime access trust (SLAT). SLATs provide an “escape hatch” for individuals who are reluctant to make large gifts for fear that they could one day need the assets they have given away. In a typical SLAT, Spouse A gifts assets to a trust for the benefit of Spouse B and their children and future descendants. The SLAT uses the BEA of Spouse A while providing Spouse B with a discretionary (or mandatory) income interest for life.

SLATs pose several concerns. First, SLATs may be “leaky.” If Spouse B receives distributions from the trust, that is in effect a waste of Spouse A’s BEA because those assets are pulled into Spouse B’s gross estate. Second, SLATs are also generally not an efficient use of GSTT exemption if distributions to the spouse and children are anticipated. Third, in the event of a divorce, the beneficiary spouse generally will retain their lifetime interest in the trust. At the same time, since SLATs are typically designed as grantor trusts, depending on the terms of the trust and other facts and circumstances, the donor spouse may remain liable for paying the SLAT’s income taxes, even if income is distributed to their former spouse. Finally, if Spouse A and Spouse B both fund SLATs, care in drafting the trust provisions is essential to avoid triggering the reciprocal trust doctrine (see Estate of Grace, 395 U.S. 316 (1969)). If the provisions of both trusts are virtually the same, the IRS could collapse the transaction and treat each trust as self–settled.

Make taxable gifts to skip persons/GSTT-exempt trusts: It is common for an individual to have a disparity between their remaining BEA and their remaining GSTT exemption. Consider an individual who has fully used their BEA through lifetime giving to their children but whose full GSTT exemption remains. They could make a taxable gift to a dynasty trust and allocate a portion or all of their remaining GSTT exemption to it. A discussion of the benefits of paying gift tax is included later in this item.

Trust GSTT inclusion ratio review: Often, review of prior gifting can uncover missed GSTT elections or unreported gifts to trusts that are intended to be GSTT–exempt. If a trust is determined to have an inclusion ratio between zero and one and, therefore, future distributions to a skip person would be partially subject to GSTT, consider using the GSTT exemption to fully exempt the trust via a late allocation.

The BEA has been used — now what?

Once the BEA has been fully used, high–net–worth individuals can continue transferring wealth to the next generation via various techniques.

Basic blocking and tackling: Each year, a donor can make annual exclusion gifts without using their BEA. In 2026, the annual exclusion amount is $19,000 per donor, per donee. This amount can be leveraged by front–loading Sec. 529 plans for children or grandchildren. In 2025 or 2026, a donor can contribute $95,000 (five times the annual exclusion amount) to a Sec. 529 plan without incurring gift tax or a GSTT if they elect to spread the gift over five years (Sec. 529(c)(2)(B)) (note, though, that other gifts to the same grandchild would use a portion of the enhanced BEA). In addition, a donor can make payments on behalf of others directly to the providers of medical and educational services free from gift tax (Sec. 2503(e)).

Grantor retained annuity trusts (GRATs): A GRAT can be used to transfer appreciation of assets at a reduced gift tax cost. The trust’s grantor makes an irrevocable transfer of appreciating assets to the GRAT and retains a qualified annuity for a term of years. The present value of the remainder interest is considered a taxable gift. In many cases, GRATs are structured so that the annuity payments almost equal the fair market value (FMV) of the contributed assets, resulting in a reduced taxable gift. The assets remaining in the GRAT, including any growth of those assets, are distributed to heirs at the end of the term. It is important to note that GSTT exemption cannot be allocated to a GRAT until the grantor’s retained interest ends at the end of the GRAT term. GSTT exemption can be allocated at that point, based on the value of the GRAT at the end of the term, but since that amount is not known at inception, GRATs typically are not used for GSTT transfers.

Leveraged sales to dynasty trusts: If an individual has used their BEA to fund a dynasty trust that is treated as a grantor trust for income tax purposes, they could consider selling assets to that trust in exchange for a promissory note. This technique is particularly effective when using flowthrough businesses that generate significant cash flow. The note could be structured as a balloon note with interest–only payments to permit the trust corpus to grow more quickly. Because it is a grantor trust, all aspects of the “sale” and “purchase” between the trust and the grantor are ignored for income tax purposes. As a result, no gain is recognized on the sale, and interest payments are disregarded.

For example, an interest in an operating partnership is sold to a grantor trust. Distributions from the business provide the trust with cash to make the note payments. Asset growth and income of the business earned after the sale will not be subject to further transfer taxation. The grantor transfers the appreciation after the date of sale undiminished by any income tax obligation, as the income tax on the earnings of the trust are paid by the grantor, with the additional benefit of reducing the grantor’s estate by the grantor’s being liable for the income tax on the trust’s earnings.

This transaction “freezes” the value of the grantor’s estate, as only the outstanding note receivable is included in the estate at the grantor’s death. Cash flow modeling is important before engaging in sales transactions to confirm sufficient cash flow is generated by the assets to make the note payments and that the grantor has the wherewithal to pay the income tax on the income generated by the trust.

Pay gift tax now: Taxpayers often look for ways to defer paying tax, but for those who anticipate having a taxable estate, gift tax paid during life is cheaper than the estate tax. This is because the gift and estate taxes are computed differently. The estate tax is “tax inclusive,” which means that all assets held by an individual as of their date of death are subject to tax, including the assets that will be used to pay the tax. However, the gift tax is “tax exclusive,” as only the value of the gifted asset is subject to the tax, not the funds that are used to pay the gift tax.

To illustrate the above point, consider a hypothetical $100 bundle of assets that an individual has available to transfer (from which taxes will also be paid). The individual is contemplating whether to make a gift during life or wait to pass the assets to their heirs at death. They could make a gift of $71.43, which will be subject to a gift tax of $28.57 ($71.43 × 40%). Or they could die holding the $100, at which point $40 of estate tax would be owed, and $60 would pass to heirs. The effective estate tax rate is then 40%, while the effective gift tax rate is only 28.57%. Paying gift tax in this example may increase the family’s retained wealth by 19.05% ($100 – $28.57 = $71.43 (with gift tax); ($100 – $40) = $60 (with estate tax); ($71.43 – $60) ÷ $60 = 19.05%).

Shifting focus from estate to income tax planning: Given the current level of the BEA, most individuals will not be subject to the estate tax. As a result, a shift in focus from estate tax planning to income tax planning may be prudent. Assets held by an individual at their death are stepped up to FMV under Sec. 1014. That step–up may prevent their heirs from being subject to large income tax bills upon a sale of inherited assets. In many instances, it may be beneficial to hold assets until death and pass assets to heirs at a stepped–up basis rather than transferring them via gift, where the recipient takes a carryover basis in the asset.

Individuals should revisit estate planning documents drafted when the BEA was lower to confirm they align with current laws and personal circumstances. For example, if a married couple’s plan involves funding a credit shelter trust at the first spouse’s death with their remaining BEA, with the residue passing to a qualified terminable interest property (QTIP) marital trust, they should think through whether this structure provides an optimal outcome. If no estate tax is expected at either death, funding a credit shelter trust may be unnecessary. Allowing all assets to pass outright or into a marital trust for the benefit of the surviving spouse may provide a better outcome, as it enables a second step–up in basis at the surviving spouse’s death — a benefit not available to assets held in a credit shelter trust.

Individuals who have funded irrevocable grantor trusts and retain the power to substitute trust assets may want to consider exercising that power and swapping low–basis assets for assets of equivalent value. Pulling low–basis assets back into the estate may result in heirs’ receiving those assets at a potentially higher stepped–up basis, minimizing or even eliminating capital gains taxes when they later dispose of the assets.

A dynamic landscape

Though the OBBBA brought permanence to the BEA, the landscape for estate planning remains dynamic. Proactive, scenario–driven planning; periodic document reviews; and leveraging both foundational and advanced techniques can enable families to enhance intergenerational wealth transfer while remaining agile in an ever–evolving policy environment. Staying engaged in legislative developments and continuously refining strategies is essential for successful, tax–efficient estate planning.

Editor

Alexander J. Brosseau, CPA, is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office.

For more information about these items, contact Brosseau at abrosseau@deloitte.com.

Contributors are members of or associated with Deloitte Tax LLP.

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