Since the One Big Beautiful Bill Act became law in July, there’s been much discussion in wealth management about how its provisions will affect tax planning for clients.
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On the estate planning front, the news is mostly good. The OBBBA made permanent the federal estate and gift tax exemption of $15 million per individual and $30 million per married couple that was
This came as a welcome relief for financial planners and high net worth families that were expecting increased federal gift tax exemptions to sunset in 2026.
But while the TCJA and OBBBA have
Inherited IRAs with large balances
Clients who have been diligently saving for retirement are often proud of the large IRAs they will be able to leave to their adult children when they pass.
However, the Secure Act and Secure Act 2.0 require that the IRA must be distributed over a 10-year distribution period for these beneficiaries, which eliminates the
Roth conversions and charitable contributions can be utilized to minimize the income tax impact on the IRA. The client can reduce or eliminate the income tax impact
Charitably minded clients can take advantage of tax-free charitable transfers via qualified charitable distributions, which make distributions directly from the IRA to qualified charities — up to $108,000 in 2025 and up to $115,000 in 2026.
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Unlike the deduction for a traditional charitable contribution, which is subject to AGI limitations in a given tax year, QCDs are excluded from gross income, effectively creating a 100% income tax reduction on the QCD.
An added benefit is that this strategy reduces the IRA balance, lowering future required minimum distributions. Alternatively, a charity can be named as a beneficiary of an IRA, which reduces or eliminates the income tax impact to beneficiaries, although unlike a QCD, this tactic will not provide an income tax benefit to the client.
The maximum gift tax myth
Financial planners in states with estate or inheritance taxes should educate clients about gifting strategies to reduce state taxes — even those clients who are below the federal estate tax threshold.
Many clients believe that the federal annual gift tax exclusion (currently $19,000 per recipient, per year) is the maximum amount that they can gift without owing gift tax. But this is not exactly true.
For clients with estates below the federal lifetime exemption, the annual exclusion is effectively just a reporting threshold at which gifts must be listed on IRS Form 709. The client does not owe any federal gift tax unless and until their lifetime exemption is exhausted, which is not an issue for most individuals.
However, individual state gifting rules may apply. Some states, such as Connecticut, levy their own separate gift taxes. Others, like Pennsylvania, recapture certain gifts within the taxable estate if the gift is made within a certain time period before death. In these states, it is especially important to implement a gifting strategy over time. These state gift taxes must be taken into consideration when planning strategies for gifting.
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Failing to plan for a client’s incapacity
Revocable trusts can be utilized to avoid probate and protect assets by establishing provisions to provide for the grantor’s care and to name co-trustees or successor trustees to administer trust assets if the grantor becomes incapacitated.
Having co-trustees instead of a single trustee provides a check against the risk that one trustee will abuse their power over an incapacitated grantor’s assets and medical care.
Failing to plan for a beneficiary’s incapacity
Another often overlooked estate planning pitfall is the risk that a beneficiary may become mentally or physically incapable of managing their affairs, including the wealth they inherit. For example, if a client’s spouse is the primary beneficiary on all accounts and they have been diagnosed with a cognitive impairment, there is a risk that the spouse’s condition will progress and they will lose the ability to manage those assets.
To mitigate this risk, a spousal trust can be created to ensure the inherited funds are properly and appropriately managed. Similarly, powers of attorney naming the spouse as the agent should be revoked and a new agent should be named.
Similarly, if a client’s child or grandchild becomes disabled or has special needs, then those beneficiaries can be protected by the incorporation of special needs trusts or ABLE accounts within the client’s estate plan.
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Pre-OBBBA clauses in estate planning documents
Finally, financial planners and their clients should review wills, trusts and other planning documents that have been drafted prior to the OBBBA. Likewise, outdated or inaccurate documents could lead to unexpected or undesirable outcomes if not amended, as could clauses that no longer reflect the client’s current circumstances.
Gifting strategies will become even more useful, and important, for meeting estate planning goals in 2026. But while the higher federal estate and gift tax exemptions are certainly positive, planners and their clients should still remain vigilant and aware in order to avoid curveballs. That awareness can help families and financial planners optimize OBBBA estate planning provisions after New Year’s Day.
