OBBB Delivers Estate Tax Gift to Ultra-High-Net-Worth Clients

For 2025, the transfer tax exemption was set at $13.99 million per individual ($27.98 million per married couple). While that rate would have dropped to roughly $7 million had Congress not decided to extend the post-2017 expansion, the new law actually increased the estate tax exemption to $15 million per individual ($30 million per married couple). Starting in 2026, those amounts will be indexed for inflation.

While these amounts are extremely generous, high-income families should also understand that they will not receive the benefit of an expanded deduction for state and local taxes (the SALT deduction). Even though the OBBB did increase the SALT cap from $10,000 to $40,000 starting in 2025, the cap will phase out for high-income taxpayers. Ultra-high-net-worth clients will not see any increased benefit from the SALT expansion.

Pursuant to the OBBB, the generation skipping transfer tax exemption is now also clearly aligned with the estate tax exemption amount ($15 million per individual), allowing for certainty when it comes to establishing dynasty trusts designed to benefit multiple generations within a family.

The rates governing trusts and estates were also made permanent, allowing for greater certainty for clients when establishing irrevocable trusts.

The OBBB also created a new limitation on the itemized deduction for charitable contributions (as well as an overall limit on itemized deductions for the highest-income taxpayers). Taxpayers who itemize will only be entitled to deduct contributions to the extent they exceed 0.5% of the taxpayer’s AGI (that disallowed portion may be carried forward if the taxpayer has other charitable contribution carryforwards for the tax year).

Estate Planning Strategies to Consider

A grantor retained annuity trust, or GRAT, essentially combines a trust that is established for a certain predetermined period of time with an annuity that pays the client, as trust creator (the grantor), a set value each year of the trust’s existence. This annuity payout is the client’s retained interest. The remaining value passes to the client’s beneficiaries, and, thus, out of his or her estate (the assets funding the GRAT can also be passed into a trust at the end of the GRAT term to delay the beneficiary’s receipt for asset protection purposes).

Any appreciation on the assets—which could be substantial for high-income taxpayers—pass gift-tax free. If the client dies during the GRAT period, the annuity payments are made to the estate, however, and the funding assets will remain in the client’s estate (basically, it would be as though the GRAT had never been created because the estate would receive a credit if any gift taxes had already been paid).

Further, clients should know that because the GRAT is a grantor trust, the income and deductions of the GRAT are included on the client’s own federal tax return until the principal assets are transferred out of the GRAT.

Clients who commonly make substantial charitable gifts might want to donate to a donor advised fund to group the deductions into a single year but provide the charity with the actual financial benefit in later years. A donor advised fund is an account set up with a financial institution that can be funded with a large donation in a single year but allows the client to direct funds to the charity or charities at their discretion in order to continue to provide a more steady stream of support to the client’s chosen organizations.

Charitably inclined clients in high-tax states may be particularly interested in charitable lead annuity trusts (CLATs) for tax-efficient charitable transfers. A CLAT provides annual payments to a charity (or donor-advised fund) for a fixed period of years (or for the donor’s life). After that period, the assets pass to the creator’s non-charitable beneficiaries. Depending on the structure, the CLAT can serve to generate large up-front income tax deductions for the client while also transferring appreciated assets to future generations outside of the client’s estate (using up none of the client’s exemption amount).

Conclusion

With the certainty provided under the OBBB, wealthy clients with assets that are expected to appreciate in value should be advised on the range of trust structures that can be used to transfer wealth to future generations on a tax-favored basis.

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