Estate and Gift Tax Planning Under the OBBBA $15M Exemption: CPA Strategy Guide

The One Big Beautiful Bill Act (OBBBA) permanently raised the federal unified estate and gift tax exemption to $15 million per individual — eliminating the TCJA sunset that would have cut the exemption to roughly $7 million after 2025. For married couples using portability, the combined available exemption reaches $30 million. The practical effect: far fewer estates will owe federal estate tax, but clients who sit just below the new exemption face a narrower planning window, and those above it face a 40% rate on every dollar transferred beyond the threshold. CPAs need to recalibrate which planning techniques remain mandatory, which become optional, and where the new exemption interacts with state estate taxes that have not moved.

Verify the exact effective date and transition provisions in the enacted statutory text of OBBBA; IRS guidance may address 2025 vs. 2026 applicability.

The $15M Exemption: Mechanics and What Did Not Change

Under IRC §2010, as modified by OBBBA, the federal unified credit against estate and gift tax is set at an exemption equivalent of $15 million per individual, indexed for inflation after enactment. The exemption covers:

• Taxable estate transfers at death (IRC §2001) — the gross estate minus allowable deductions minus the IRC §2010 credit
• Taxable lifetime gifts (IRC §2502) — cumulative gifts above the annual exclusion reduce the available estate exemption dollar-for-dollar
• Generation-skipping transfers (IRC §2631) — the GST exemption is also set at $15 million; allocations to trusts for grandchildren and more-remote descendants shelter those transfers from the 40% GST tax

The 40% rate on excess transfers did not change. IRC §2001(c) retains the 40% flat rate on all transfers above the exemption, whether at death or by lifetime gift.

Pre-OBBBA baseline: In 2025, the federal exemption was $13.99 million per individual (IRS Rev. Proc. 2024-40). Without OBBBA, the TCJA sunset scheduled for December 31, 2025 would have cut the exemption to approximately $7 million per person — potentially subjecting millions of previously shielded estates to federal estate tax. OBBBA prevents that sunset permanently.

Anti-clawback protection: IRS Reg. §20.2010-1(c) protects donors who made taxable gifts under prior higher exemption amounts from retroactive estate tax if the exemption later declines. With OBBBA permanently raising the exemption, this protection matters less prospectively — but practitioners should still document the timing of prior large gifts made under higher exemption periods.

Portability: The Two-Spouse Strategy

For married couples, the IRS allows the estate of the first spouse to die to transfer its unused exemption to the surviving spouse — the Deceased Spousal Unused Exclusion (DSUE), governed by IRC §2010(c). If the first spouse dies with a $5 million taxable estate and a $15 million exemption, the $10 million DSUE transfers to the surviving spouse, who then commands up to $25 million in combined exemption ($15M personal + $10M DSUE).

The portability election is not automatic. The executor of the first decedent's estate must make a timely portability election on Form 706 within nine months of death (with a six-month automatic extension). An estate that owes no federal estate tax can still — and often should — file Form 706 solely to preserve portability. Under Rev. Proc. 2022-32, estates that missed the filing deadline can make a late portability election within five years of death.

DSUE is not inflation-indexed. The surviving spouse's DSUE is frozen at the nominal dollar value from the date of the first spouse's death. The surviving spouse's own $15M exemption is inflation-indexed; the added DSUE is not. A $10 million DSUE collected today does not grow with inflation over the surviving spouse's lifetime — creating a modest incentive for the survivor to use the DSUE first in subsequent gifting.

Portability and bypass trusts are not mutually exclusive. A credit shelter (bypass) trust funded with the first spouse's exemption at death uses that exemption directly and allows trust assets to appreciate outside the surviving spouse's taxable estate permanently. For very large estates, bypass trust funding may still be appropriate even when portability is available — appreciated assets held in a bypass trust for 20 years after the first death avoid estate tax on all growth, which a DSUE collected at death cannot replicate.

Annual Exclusion Gifting: The Foundation of Any Gifting Strategy

The annual exclusion under IRC §2503(b) permits any donor to give any number of recipients up to the inflation-adjusted exclusion amount per year without using any lifetime exemption. For 2025, the annual exclusion is $19,000 per recipient (IRS Rev. Proc. 2024-40). Married couples using gift-splitting under IRC §2513 can give $38,000 per recipient — but the election requires a Form 709 filing even if no tax is owed.

A couple with four adult children and eight grandchildren can shift $38,000 × 12 = $456,000 per year with no gift tax exposure, no lifetime exemption usage, and no income tax consequences for recipients. Over a decade, that is $4.56 million removed from the taxable estate — at no tax cost.

Direct tuition and medical payments under IRC §2503(e) operate entirely outside the gift tax system — no dollar limit, no annual exclusion reduction, no lifetime exemption usage. Payments must go directly to the educational institution or health care provider; reimbursements to the recipient do not qualify. For clients with college-age grandchildren or family members with significant medical expenses, §2503(e) payments can move hundreds of thousands of dollars over time with zero tax cost.

Annual exclusion gifts carry carryover basis, not a step-up. The recipient takes the donor's adjusted basis under IRC §1015. For assets with large unrealized gains — appreciated securities, closely held business interests — gifting during life transfers the embedded gain liability to the recipient. In contrast, holding the same asset until death produces a step-up in basis under IRC §1014 that eliminates accumulated gain permanently. This tradeoff — annual exclusion gifting vs. retaining an asset for a step-up — is the central analysis in any estate plan involving high-appreciation holdings. For the complete basis rules governing both paths, see Inheritance vs. Gift: Tax Implications CPAs Must Know.

Advanced Gifting Techniques: Beyond Annual Exclusions

For estates still above the $15M exemption — or clients who want to maximize transfer efficiency regardless of exemption levels — several structures remain powerful.

Grantor Retained Annuity Trusts (GRATs): The donor transfers assets to an irrevocable trust and retains an annuity for a fixed term (commonly 2–10 years). If the transferred assets outperform the IRS §7520 hurdle rate (published monthly), the excess appreciation passes to beneficiaries estate-tax-free. Zero-out GRATs — where the retained annuity's present value equals the amount transferred — allow all upside to pass with no gift tax consumed. The risk: if the donor dies during the GRAT term, the trust assets are pulled back into the gross estate under IRC §2036.

Spousal Lifetime Access Trusts (SLATs): An irrevocable trust funded with one spouse's lifetime exemption for the benefit of the other spouse and descendants. The donor spouse removes assets from their taxable estate; the beneficiary spouse retains indirect access through distributions. SLATs must be carefully structured to avoid the reciprocal trust doctrine if both spouses create them simultaneously (the IRS will collapse mirror-image SLATs as if no transfer occurred).

Qualified Personal Residence Trusts (QPRTs): The donor transfers a personal residence to a trust while retaining the right to live in it for a fixed term. The gift is valued at a fraction of full FMV because the retained term interest is subtracted from the transferred value — the §7520 discount can be substantial when interest rates are high. If the donor survives the retained term, the residence (and all appreciation) passes to beneficiaries at a fraction of its estate tax value.

Outright gifts of appreciating assets: For clients whose estates significantly exceed $15M, using lifetime exemption now rather than at death moves all future appreciation out of the taxable estate. A client who gifts $5M of closely held business stock growing at 12% per year removes not just $5M but the entire future appreciation — a $5M gift appreciating for 15 years becomes $27M outside the estate, saving $4.8M in estate tax on the growth alone (($27M − $5M) × 40% marginal rate × applicable percentage above exemption).

State Estate Taxes: The Gap CPAs Cannot Ignore

The federal $15M exemption does not govern state estate taxes. Seventeen states and the District of Columbia impose their own estate or inheritance taxes with exemptions substantially below the federal threshold:

A client with a $5 million estate owes zero federal estate tax but potentially 10%–16% Oregon estate tax on amounts above $1 million. A New York client with a $7.5 million estate hits the New York cliff — above 105% of the NY exemption, the NY estate tax applies to the entire estate, not just the excess, creating a marginal effective rate exceeding 100% at the cliff threshold.

Domicile planning: Changing legal domicile from a high-estate-tax state to a no-estate-tax state (Florida, Texas, Nevada, South Dakota) can eliminate state estate tax entirely. The bar is fact-intensive: driver's license, voter registration, updated estate planning documents, severance of prior-state ties, and physical presence documentation are all evidence courts examine when a state contests a domicile change. Clients should document the change proactively, not reconstruct it after the fact.

Non-resident property: Real property and tangible personal property located in a state is generally subject to that state's estate tax regardless of the decedent's domicile. A Florida-domiciled client with a Massachusetts vacation home may owe Massachusetts estate tax on that property at Massachusetts rates and with only a pro-rated share of the Massachusetts exemption.

State QTIP elections: Some states permit a state-level QTIP election independent of the federal QTIP election. This allows estates to maximize the state marital deduction (deferring state tax to the second death) while using the first spouse's state exemption differently from the federal — a meaningful planning lever in states with low exemptions.

Basis Tradeoffs: Gift Now vs. Hold for the Step-Up

The most important planning question for any client with large unrealized gains: gift the asset now, or hold until death for a basis step-up?

In favor of gifting:

• Removes all future appreciation from the taxable estate — the gift tax value is today's FMV, not the appreciated value at death
• Deploys lifetime exemption while it exists (policy risk: a future Congress could reduce the $15M exemption)
• Annual exclusion gifts cost nothing and permanently remove appreciation from the estate

In favor of holding for the step-up:

• IRC §1014 eliminates all embedded gain permanently — no capital gains tax for heirs, no carryover basis problem
• The capital gains rates applicable to heirs — 0%, 15%, or 20% + 3.8% NIIT — determine the dollar value of the step-up, which can dwarf any estate tax savings on assets with large, long-accumulated gains
• For clients with estates comfortably below $15M, there is no estate tax cost to retaining appreciated assets, making the step-up a pure win

Break-even framework: Compare the estate tax cost of retaining the asset (40% × the marginal estate tax rate × the asset's value above the available exemption) against the capital gains tax savings from the step-up (gain × applicable LTCG rate). When the estate tax cost exceeds the capital gains savings, gifting wins. When the converse is true — the gain tax savings exceed the estate tax cost — hold for the step-up.

Example: A client with a $20M estate (net, after deductions) holds stock with a $1M basis now worth $4M. The $3M embedded gain would cost the heir $600K–$756K in capital gains tax (20% + 3.8% NIIT). The estate tax cost of retaining that $4M asset — in a $20M estate already $5M above the exemption — is $4M × 40% = $1.6M. The step-up saves $600–756K; the estate tax cost is $1.6M. Gifting now (consuming exemption or paying gift tax) wins. Conversely, for a client at $12M — below the $15M exemption — there is no estate tax cost, and the step-up saves capital gains tax with no offsetting downside.

Interaction with Business Succession Planning

For business-owner clients, the estate and gift tax exemption directly controls the cost of transferring closely held interests. A business worth $8M may transfer entirely within the $15M exemption at no tax cost; a $25M business requires structure.

Valuation discounts: Closely held business interests — LLC membership interests, S-Corp minority shares — often qualify for lack-of-control and lack-of-marketability discounts of 20%–40% applied to FMV as determined by a qualified appraisal (IRC §2031, Reg. §20.2031-1). These discounts reduce the gift or estate tax value of the transferred interest. A $2M minority LLC interest appraised at a 30% combined discount transfers at $1.4M for gift tax purposes, extending the effective reach of the exemption.

Buy-sell agreements and IRC §2703: A buy-sell agreement that fixes the price for a business interest transferring at death must meet the IRC §2703(b) three-part test — bona fide arrangement, price reflecting arm's-length bargaining, comparable to agreements among unrelated parties — to govern estate valuation rather than the open-market FMV the IRS would otherwise determine. For the complete mechanics of buy-sell structure and insurance funding, see How to Structure a Buy-Sell Agreement. For the full succession planning framework integrating estate tax, exit structure, and insurance coordination, see Business Succession Planning: How to Coordinate the Tax and Insurance Components.

Frequently Asked Questions

What is the federal estate and gift tax exemption under OBBBA?

The One Big Beautiful Bill Act (OBBBA) raised the federal unified estate and gift tax exemption to $15 million per individual, indexed for inflation after enactment. For married couples who make a portability election, the combined available exemption can reach $30 million. Practitioners should confirm the exact effective date and any transition rules in the enacted statutory text and applicable IRS guidance.

Does the $15M exemption apply to both lifetime gifts and transfers at death?

Yes. The $15M exemption is a unified credit that applies to both cumulative taxable lifetime gifts (amounts above the annual exclusion) and the taxable estate at death. Each taxable gift during life reduces the exemption available at death dollar-for-dollar. Annual exclusion gifts ($19,000 per recipient in 2025) do not consume any of the lifetime exemption.

What is portability and how does the DSUE election work?

Portability allows the estate of the first spouse to die to transfer its unused exemption — the Deceased Spousal Unused Exclusion (DSUE) — to the surviving spouse. The executor must file Form 706 to elect portability even if no estate tax is owed. Under Rev. Proc. 2022-32, a late portability election is available for up to five years after the decedent's death. A surviving spouse who collects a large DSUE can shelter up to $30M or more in combined assets from federal estate tax.

Are gifts of appreciated property a good idea under the $15M exemption?

It depends on the client's estate size. Gifts of appreciated property carry the donor's low cost basis to the recipient (IRC §1015) — when the recipient sells, they owe capital gains tax on all accumulated appreciation. Assets held until death receive a stepped-up basis to FMV, permanently eliminating that gain. For clients comfortably below the $15M exemption, holding appreciated assets for the step-up is almost always superior. For clients well above the exemption, gifting removes future appreciation from the estate, which may outweigh the lost step-up benefit.

Do state estate taxes still apply when the federal exemption is $15M?

Yes. Many states — including Massachusetts ($2M exemption), Oregon ($1M), Washington ($2.2M), and New York ($7.16M with a cliff provision) — impose their own estate taxes well below the federal threshold. A client with a $5M estate owes zero federal estate tax but may face significant state liability. Domicile planning and careful siting of non-resident property are key levers for clients in high-estate-tax states.

What is the annual gift tax exclusion and how does gift-splitting work?

For 2025, the annual exclusion is $19,000 per recipient (IRS Rev. Proc. 2024-40; IRC §2503(b)). Married couples who elect gift-splitting on Form 709 can give $38,000 per recipient — and the Form 709 election must be filed even when no tax is due. Direct payments to educational institutions and health care providers are excluded from gift tax entirely under IRC §2503(e), with no dollar cap.

How does the OBBBA exemption interact with business succession planning?

A higher federal exemption allows more closely held business value to pass estate-tax-free — either through lifetime gifts or at death. Valuation discounts on minority business interests (typically 20%–40% for lack of control and lack of marketability) extend the effective reach of the exemption further. Buy-sell agreements governing the price of business interests transferring at death must meet the IRC §2703(b) three-part test to control estate valuation rather than being overridden by IRS FMV determination.

What is the gift-to-step-up tradeoff for assets with large unrealized gains?

The step-up under IRC §1014 eliminates capital gains tax on all appreciation accumulated during the donor's lifetime. Gifting transfers that gain liability to the recipient via carryover basis (IRC §1015). For clients below the $15M exemption, the step-up wins cleanly — there is no estate tax cost to retaining the asset. For clients above the exemption, the break-even depends on the embedded gain size, the applicable capital gains rate, and how much estate tax exposure the retained asset creates. A simple comparison: capital gains tax cost of the step-up × heir's applicable rate vs. 40% estate tax on the asset's value above the available exemption.

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