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Why this topic matters
The One Big Beautiful Bill Act (OBBBA) set the estate, gift, and generation-skipping transfer exemptions at $15 million per person ($30 million per married couple) from 2026, indexed for inflation from 2027, with no sunset. Tax Compliance and Planning (TCP) tests how that changes planning: for most families the focus moves from avoiding estate tax to minimizing income tax (especially through basis step-up), while very wealthy families still use trusts and valuation techniques.
Planning after OBBBA — the big shift
- Estates under the exemption owe no estate tax, so holding appreciated assets until death to get a stepped-up basis (fair market value (FMV) at death) often beats giving them away during life — lifetime gifts carry over the donor's low basis.
- Gifting still makes sense for assets expected to appreciate strongly (removing future growth), for very large estates, and for state estate tax planning (several states have much lower exemptions).
- Portability means a married couple can often rely on the surviving spouse using both exemptions — but only if the first estate files a timely Form 706 to elect it.
EXAMPLE: A widow with a $6 million estate owns stock bought for $200,000, now worth $2 million. If she gifts it to her son, his basis is $200,000 — a later sale triggers $1.8 million of gain. If he inherits it, his basis steps up to $2 million and the gain disappears. Because her estate is well under the exemption, keeping the stock until death saves income tax with no estate tax cost.
Lifetime gifting tools
- Annual exclusion gifts: $19,000 per donee (2026), doubled to $38,000 with gift splitting — no use of lifetime exemption.
- Direct payment of tuition and medical expenses — unlimited and excluded when paid to the provider.
- Section 529 "superfunding": elect to treat a contribution as made over 5 years — up to $95,000 per beneficiary ($190,000 for a couple) at once.
- Gifts of high-growth or discounted assets remove future appreciation from the estate.
- Gift to grantor trusts so the donor pays the trust's income tax — a further tax-free transfer.
Trusts in estate planning
| Trust | Purpose | Tax features |
|---|---|---|
| Revocable living trust | Avoids probate, manages assets on incapacity, privacy | Grantor trust; included in the estate; basis step-up at death — no estate tax savings |
| Irrevocable life insurance trust | Owns life insurance so proceeds are outside the estate | Premium gifts use Crummey withdrawal powers to qualify for the annual exclusion; transferring an existing policy within 3 years of death brings it back into the estate |
| Grantor retained annuity trust | The grantor receives an annuity for a term; remaining growth above the Internal Revenue Service (IRS) assumed rate passes to heirs | Can be "zeroed out" — little or no taxable gift; the grantor must survive the term |
| Spousal lifetime access trust | Irrevocable gift to a trust for the spouse and descendants | Uses the donor's exemption while keeping indirect access through the spouse |
| Qualified personal residence trust | Transfers a home at a discounted gift value | Grantor keeps use for a term |
| Charitable remainder trust | Income stream to the donor, remainder to charity | Income tax deduction for the remainder's present value; the trust can sell appreciated assets tax-free, spreading gain over the payments |
| Charitable lead trust | Income to charity for a term, remainder to heirs | Reduces the taxable value of the gift to heirs |
| Dynasty (generation-skipping) trust | Benefits multiple generations | Allocate generation-skipping transfer exemption so later distributions escape transfer tax |
| Intentionally defective grantor trust sale | Sell appreciating assets to a grantor trust for a note | No gain on the sale (grantor trust); growth above the note's interest rate passes to heirs |
Valuation techniques
- Family limited partnerships and limited liability companies: gifting minority, non-voting interests may qualify for discounts for lack of control and lack of marketability, reducing the gift or estate value. They need a genuine business purpose and must respect formalities — otherwise the Internal Revenue Code Section 2036 can pull assets back into the estate.
- Qualified appraisals are required, and gift tax returns should adequately disclose gifts to start the statute of limitations.
- Special use valuation (farms and closely held business real property) and installment payment of estate tax (Section 6166) help family businesses.
Marital planning
- The unlimited marital deduction defers estate tax until the second death — for property passing outright or in a qualified terminable interest property (QTIP) trust.
- For a non-citizen spouse, a qualified domestic trust is needed to get the marital deduction at death, and lifetime gifts are limited to an annual exclusion ($194,000 in 2026).
- Portability versus a credit shelter (bypass) trust: portability is simpler and gives a second basis step-up, but a bypass trust also shields growth, protects assets for children of a first marriage, and uses the generation-skipping exemption (which is not portable).
Business succession
- Buy-sell agreements (funded with life insurance) set a price and buyer for an owner's interest at death or retirement — cross-purchase versus entity (redemption) structures have different basis results.
- Gift or sell non-voting interests gradually to the next generation; consider the employee stock ownership plan route for an outside-family exit.
How it is tested
- Choose between lifetime gifts and inheritance given basis and exemption.
- Match a goal to the right trust.
- Apply annual exclusions, 529 five-year elections, and direct payments.
- Evaluate portability versus a bypass trust and non-citizen spouse rules.
EXAM TIP: With a $15 million exemption, the default answer for a modest estate with appreciated assets is usually "hold until death for the step-up in basis" — not "gift it now".