Understanding the Impact of the New Federal Estate and Gift Tax Exemption

On July 4, 2025, President Trump enacted a significant change to the federal estate and gift tax landscape through Section 70106 of H.R. 1. This new law introduces a permanent $15 million exemption for federal estate and gift taxes, taking effect for decedents dying and gifts made after December 31, 2025. While the exemption will be subject to inflation adjustments, it raises critical questions for estate planners and clients alike about its implications for estate planning strategies.

The Implications of Permanency in Tax Law

The Stability Perception

At first glance, the $15 million exemption, set for 2026, may not seem markedly different from the prior year’s amount, adjusted for inflation. However, the permanency of this exemption—as opposed to the previous law with a sunset clause—comes with its own set of questions. Why would estate planners consider new strategies, especially if political shifts could drastically alter the exemption in the near future?

The absence of a sunset clause means any future adjustments would require an affirmative political effort, placing the onus on a new administration to propose increases in estate and gift taxes. This shift in strategy may counteract the hands-off approach of prior years. Business owners and farmers, who might be heavily impacted, may find themselves in a precarious position should such adjustments occur.

Political Stability Versus Future Changes

A prolonged period—up to a dozen years—of a high federal estate and gift tax exemption would likely alter public perception surrounding taxation. Rapid changes to this exemption could have disruptive effects on families, particularly those involved in businesses or farming. While future administrations might indeed modify exemption limits, a sudden reduction may be politically unpopular, making drastic cuts less likely.

Reassessing Lifetime Transfer Strategies

Grandfathering the $15 Million Exemption

One issue stemming from the new exemption relates to the effectiveness of large lifetime transfers. In particular, how can these transfers be structured in a way that minimizes tax liabilities?

For instance, consider an individual who transfers $15 million in appreciated assets while having a much lower initial tax basis. If, during their lifetime, Congress alters the estate tax exemption (perhaps down to $12 million), the implications for estate planning could be vast. The potential tax savings on the transfer may not outweigh future income tax liabilities on asset appreciation.

Example of Potential Tax Liabilities

Taking this further, if the transferred assets appreciated significantly, the total taxes owed could exceed the initial tax benefits gained from the transfer. This means estate planners must carefully weigh the benefits of leveraging the $15 million exemption against the downsides of maintaining a carryover income tax basis for gifted appreciated assets.

Navigating Trusts Under the New Law

Utilizing Spousal Limited Access Trusts (SLATs)

One advantage offered by the new law is the opportunity for married couples to establish irrevocable Spousal Limited Access Trusts (SLATs) more effectively. By staging these trusts over time—with one spouse funding a SLAT and delaying the establishment of the second for a few years—the chance of the IRS disputing their interrelation diminishes.

This strategy can enhance estate planning, allowing couples to minimize taxes while making significant gifts for the future.

The Balancing Act of Estate Planning

Weighing Benefits Against Risks

In conclusion, the new federal estate and gift tax exemption demands a nuanced approach to estate planning. The balancing act involves comparing potential estate tax savings derived from transferring assets and the loss of a stepped-up income tax basis on appreciated assets.

Advisors and clients alike must reassess the focus of their estate planning strategies. Monitoring the current legal landscape, even without the threat of a flawless sunset provision, will be crucial in optimizing tax savings and safeguarding clients’ financial futures.

By following these strategies and reassessing options in light of the new federal estate and gift tax exemption, estate planners can navigate the complexities of this tax landscape and tailor solutions that resonate with their clients’ goals. As we prepare for the changes on the horizon, understanding these implications will be critical for effective estate planning.