IRC 2010 and the OBBBA Permanent Estate and Gift Tax Exemption: Portability, GST, and State Divergence Planning

The One Big Beautiful Budget Act (OBBBA) made a permanent change to the federal estate and gift tax landscape that every estate planning practitioner must understand and communicate to clients: the basic exclusion amount (BEA) under IRC 2010(c) is now permanently set at $15 million per person for calendar year 2026, indexed for inflation in subsequent years (confirm the precise amount at IRS.gov). That figure eliminates the TCJA sunset, ends years of planning uncertainty, and pushes the federal-to-state exemption gap to a level that makes state estate tax analysis mandatory for virtually every client with significant assets.

This guide is written for enrolled agents, CPAs, and tax attorneys who advise clients on federal and state estate and gift tax planning. It covers: what OBBBA changed and what it did not; portability and DSUE mechanics under IRC 2010(c)(5); GST exemption and dynasty trust planning under IRC 2631(c); anti-clawback protection under Treas. Reg. 20.2010-1(c) for prior gifts; the state estate tax divergence problem with a special focus on New York's cliff provision; annual exclusion gifting programs under IRC 2503(b); basis planning under IRC 1014; a practitioner action checklist; and six frequently asked questions at practitioner depth. All dollar amounts, thresholds, exemption levels, and state tax rules: verify at IRS.gov and the applicable state tax agency before use in any client engagement. This guide is informational and does not constitute legal or tax advice.

Section 1: What OBBBA Changed -- the Permanent $15 Million BEA

The starting point is the TCJA. The Tax Cuts and Jobs Act of 2017 doubled the basic exclusion amount (BEA) under IRC 2010(c) from approximately $5 million (inflation-indexed from a 2010 base) to $10 million (inflation-indexed from the same base). The result was a BEA that was roughly doubled in nominal terms for 2018 through 2025. However, the TCJA included a sunset provision: after December 31, 2025, the BEA would revert to its pre-TCJA level. Based on inflation-adjustment trajectories, practitioners and clients expected the post-sunset BEA for 2026 to be approximately $7 million per person. Hedge all specific prior-law BEA figures to IRS.gov and the applicable Revenue Procedures; do not rely on any secondary-source estimate without confirming at IRS.gov.

That anticipated sunset drove an enormous volume of estate planning activity in 2024 and 2025. Clients made large lifetime gifts, funded irrevocable trusts, and completed transactions intended to use BEA before the expected reversion. This was the "use-it-or-lose-it" window, and it produced some of the most intense estate planning activity practitioners have seen in a generation.

OBBBA eliminated the sunset entirely and permanently set the BEA at $15 million per person for calendar year 2026, indexed for inflation in subsequent years (per IRC 2010(c) as amended; confirm the 2026 BEA at IRS.gov). The $15 million amount is higher than the TCJA elevated amount (which, for 2025, was approximately $13.61 million per person -- hedge this figure to IRS.gov and the applicable Revenue Procedure). OBBBA did not merely extend the TCJA elevated BEA; it raised the floor above the TCJA level and made that new floor permanent.

What this means for prior "sunset planning"

Clients who made large gifts in 2024 or 2025 to beat the expected TCJA sunset were acting on sound professional advice. Those gifts were appropriate under the law as it existed at the time. With OBBBA's permanent $15 million BEA, those clients will not face the clawback concern that was the central risk of sunset planning (discussed in Section 4 below). The gifts used BEA at the TCJA elevated level, and the permanent OBBBA BEA is higher -- so there is no estate at which the BEA at death is lower than the BEA used for prior gifts.

The practical consequence: clients with estates below $15 million per person who made large gifts during 2018-2025 should not expect any federal estate tax liability attributable to those gifts. But practitioners must still confirm: (1) that all taxable gifts were reported on Form 709; (2) that the anti-clawback position under Treas. Reg. 20.2010-1(c) has not been modified by subsequent guidance; and (3) that any state estate tax consequences of the gifting program have been analyzed separately (see Section 5 below), because state gift tax or estate tax treatment of prior gifts may differ from federal treatment.

The inflation-indexing mechanism

The $15 million BEA for 2026 is the base amount; it will be adjusted for inflation in subsequent years under the indexing mechanism in IRC 2010(c) (confirm the indexing formula and applicable chained CPI or other measure at IRS.gov). The IRS announces the inflation-adjusted BEA for each calendar year in a Revenue Procedure published in the fall of the preceding year. Practitioners must confirm the current-year BEA at IRS.gov using the applicable Revenue Procedure before advising clients on the amount available for gifts or transfers. Do not carry forward a BEA figure from a prior year without confirming the current year's announced amount.

Section 2: Portability and DSUE Planning

Portability under IRC 2010(c)(5) allows a surviving spouse to use the Deceased Spousal Unused Exclusion (DSUE): the portion of the predeceased spouse's BEA that was not used by the predeceased spouse's estate. With the BEA set at $15 million per person for 2026 (confirm at IRS.gov under IRC 2010(c) as amended by OBBBA), portability becomes even more valuable: a surviving spouse who properly elects portability can potentially transfer the combined BEAs of both spouses free of federal estate and gift tax -- up to $30 million combined (illustrative; based on 2 times the per-person BEA; confirm the per-person BEA at IRS.gov).

Portability is not automatic. The portability election must be made by the executor of the predeceased spouse's estate on a timely filed Form 706 (the United States Estate (and Generation-Skipping Transfer) Tax Return). This requirement applies even when the predeceased spouse's estate owes no federal estate tax because the estate is below the BEA. The Form 706 must be filed within 9 months of the date of the predeceased spouse's death; a 6-month extension is available on Form 4768. Hedge all Form 706 filing deadlines and portability election mechanics to the current Form 706 instructions and IRS.gov. For a detailed treatment of Form 706 preparation and the portability election, see the AmericasTax Form 706 Estate Tax Return, Portability, and DSUE Practitioner Guide.

The DSUE computation and how it interacts with the permanent BEA

The DSUE amount is generally the lesser of: (1) the BEA in effect at the time of the predeceased spouse's death, minus the predeceased spouse's taxable estate (simplified); or (2) the applicable exclusion amount in effect at the time the surviving spouse makes a transfer. Hedge all DSUE computation mechanics to IRC 2010(c)(5) and IRS.gov; the precise formula involves additional adjustments and limitations. With the OBBBA permanent BEA, the DSUE available to the surviving spouse can be substantial -- but only if the executor of the predeceased spouse's estate filed a timely Form 706 and made the election.

The surviving spouse can use the DSUE for:

• Lifetime gifts: The surviving spouse may apply the DSUE amount against taxable gifts made during the surviving spouse's lifetime. This allows the surviving spouse to make gifts using both the surviving spouse's own BEA and the predeceased spouse's unused BEA.
• Estate tax at death: The DSUE amount is added to the surviving spouse's own applicable exclusion amount to compute the total applicable exclusion available to the surviving spouse's estate at death. The surviving spouse's estate is entitled to use the combined exclusion, provided the portability election was timely made and the DSUE is properly computed and reported on Form 706.

Late portability election: Rev. Proc. 2022-32

If the executor of the predeceased spouse's estate missed the 9-month Form 706 deadline, Rev. Proc. 2022-32 provides a simplified method for making a late portability election. Under Rev. Proc. 2022-32, the executor may file a Form 706 solely for the purpose of electing portability within 5 years of the date of the predeceased spouse's death. The Form 706 must be filed on paper (not electronically), and the applicable notation on the return must identify it as filed pursuant to Rev. Proc. 2022-32. Hedge all Rev. Proc. 2022-32 specifics, including the 5-year period, the filing mechanics, and any modifications by subsequent IRS guidance, to Rev. Proc. 2022-32 and IRS.gov; confirm the procedure has not been superseded or modified.

Practitioners should advise all surviving spouses of recently deceased spouses to file a Form 706 to elect portability, even for estates where the deceased spouse's estate is far below the BEA and no federal estate tax is owed. The DSUE could become significant as the surviving spouse's estate grows through continued accumulation, appreciation, or receipt of inheritances. The cost of filing a Form 706 for portability is modest compared to the potential tax savings if the DSUE is later needed.

Portability vs. credit shelter trust: the planning question remains

Before portability was available, married couples typically used a credit shelter trust (also called a bypass trust or B trust) to preserve both spouses' exemptions: at the first spouse's death, assets up to the exemption were funded into the credit shelter trust, which used the deceased spouse's exemption and kept those assets (and all appreciation) out of the surviving spouse's taxable estate. Portability simplified the planning: the surviving spouse can now use the DSUE without a credit shelter trust.

With the OBBBA permanent BEA at $15 million per person, many practitioners have asked whether credit shelter trusts are still necessary. The honest answer is: it depends. Key considerations include:

• GST exemption: Portability does NOT apply to the GST exemption. A credit shelter trust funded with the predeceased spouse's GST exemption (allocated at the first death) can shelter trust assets from GST tax for multiple generations. The DSUE, by contrast, is only a federal estate and gift tax concept; it does not provide GST exemption to the surviving spouse beyond the surviving spouse's own GST exemption. For clients interested in dynasty trust planning, a credit shelter trust at the first death may still be the superior strategy.
• Appreciation: Assets inside a credit shelter trust appreciate outside the surviving spouse's taxable estate. Assets covered only by portability (the DSUE) remain in the surviving spouse's estate and may appreciate into a taxable position if the surviving spouse's estate grows significantly. This is less of a concern at the $15 million BEA level, but still a factor for high-accumulation clients.
• State estate taxes: If the client is domiciled in a state with a state estate tax and a lower state exemption, a credit shelter trust funded up to the state exemption may save state estate tax at the first death that portability would not accomplish (because state portability may not be available; hedge to applicable state law and the applicable state tax agency).

Section 3: GST Exemption and Dynasty Trust Planning

The generation-skipping transfer (GST) tax (IRC 2601 and following) is a separate federal transfer tax that applies to transfers to "skip persons" -- generally grandchildren and more remote descendants (and certain trusts for their benefit). Like the estate tax, the GST tax has an exemption: under IRC 2631(c), the GST exemption per person equals the BEA. With OBBBA permanently setting the BEA at $15 million for 2026 (inflation-indexed thereafter; confirm at IRS.gov), the GST exemption is also permanently set at $15 million per person. This is the most consequential development in dynasty trust planning in a generation.

For a deep treatment of GST tax mechanics, inclusion ratios, applicable fractions, and the three types of GST transfers, see the AmericasTax GST Generation-Skipping Transfer Tax: IRC 2601-2642, Inclusion Ratio, and Practitioner Guide.

Dynasty trust planning with the permanent elevated GST exemption

A dynasty trust is a long-term irrevocable trust designed to hold and grow assets for multiple generations while remaining exempt from federal transfer tax at each generational level. Properly funded with GST exemption allocated at the time of contribution (per the automatic or affirmative allocation rules of IRC 2631 and IRC 2642), a dynasty trust can shelter the contributed assets -- and all appreciation on those assets -- from federal estate, gift, and GST tax for as long as the trust continues to exist (which may be in perpetuity in states that have abolished the rule against perpetuities).

With a $15 million GST exemption per person for 2026 (confirm at IRS.gov under IRC 2631(c)), a married couple can potentially fund a dynasty trust with $30 million in combined GST exemption (illustrative; based on 2 times the 2026 per-person GST exemption; confirm the exact amount at IRS.gov and hedge to the portability limitation on GST exemption -- GST exemption is NOT portable in the same way as the estate tax BEA). The result: $30 million in assets (and all future appreciation) can be sheltered from federal transfer tax for multiple generations, with no additional federal estate or GST tax at each generational transfer within the trust.

This is a meaningful change from prior law. Under the pre-TCJA exemption level, funding a dynasty trust at the then-applicable exemption level required a much smaller initial contribution to exhaust the exemption. The permanent elevated exemption under OBBBA means clients can fund dynasty trusts at a significantly higher level before exhausting their GST exemption, making this planning more accessible to a broader range of high-net-worth clients.

GST exemption allocation mechanics: IRC 2631 and IRC 2642

The GST exemption is allocated to transferred property under IRC 2631 and IRC 2642. Allocation may be automatic or affirmative:

• Automatic allocation (IRC 2632(b) and (c)): For direct skip transfers during life, GST exemption is automatically allocated to the transfer amount unless the transferor elects out. For indirect skip transfers to a trust, automatic allocation rules apply under IRC 2632(c) if the trust has no non-skip person beneficiaries (among other conditions). Hedge all automatic allocation mechanics to IRC 2632 and IRS.gov.
• Affirmative allocation: A transferor may also affirmatively allocate GST exemption on a timely filed Form 709 (gift tax return) or on Form 706 (estate tax return). Form 709 is the primary vehicle for GST exemption allocation during lifetime. For a practitioner guide to Form 709 and GST exemption allocation mechanics, see the AmericasTax Form 709 Gift Tax Return: Gift Splitting and GST Allocation Practitioner Guide.

Impact on existing dynasty trusts: consider additional contributions

Clients who already have dynasty trusts funded at lower prior-law exemption levels may want to consider whether the OBBBA permanent elevated GST exemption provides an opportunity for additional contributions. If a client has remaining GST exemption (because prior contributions did not exhaust the pre-OBBBA exemption level, or because the OBBBA permanently raised the available amount), contributions to an existing dynasty trust can be made with GST exemption allocated to achieve an inclusion ratio of zero for the contributed assets. Hedge all existing trust modification and contribution mechanics to the trust instrument, applicable state law, and IRC 2631 and 2642 at IRS.gov.

Estate freeze techniques and the permanent elevated BEA

The permanent elevated BEA also increases the utility of estate freeze techniques that operate in combination with the BEA and GST exemption. GRATs (IRC 2702), qualified personal residence trusts (QPRTs), and charitable lead annuity trusts (CLATs) all produce transfers that may consume BEA or GST exemption at the time of the transfer. With the BEA and GST exemption both permanently elevated at $15 million per person, clients have more BEA "buffer" available to absorb any gift tax cost on these techniques before consuming precious exemption. For the mechanics of these techniques, see the AmericasTax IRC 7520 Rate, GRATs, CLATs, and QPRTs: Valuation and Estate Freeze Techniques Practitioner Guide.

Retained interest arrangements and intentionally defective grantor trusts (IDGTs) also interact with the permanent BEA. If a retained interest causes estate inclusion under IRC 2036 or IRC 2038, the included amount is sheltered from estate tax to the extent of the BEA. With a $15 million BEA, more estate inclusion events become non-taxable at the federal level (though state estate tax consequences must still be analyzed). For the IRC 2036 and 2038 estate inclusion mechanics, see the AmericasTax IRC 2036 and 2038: Retained Interests, GRATs, IDGTs, and Estate Inclusion Practitioner Guide.

Section 4: Anti-Clawback Protection for Prior Gifts

Throughout the TCJA elevated-BEA period (2018-2025), one of the most significant planning concerns was "clawback": the risk that a client who made large lifetime gifts using the elevated TCJA BEA would, upon death, find that those gifts were pulled back into the taxable estate if the BEA at the time of death was lower than the BEA when the gifts were made. In other words: what if the client used $13 million of BEA in 2024, but the BEA at death in 2027 was only $7 million? Would the estate be taxed on the $6 million difference?

The IRS addressed this concern directly in Treas. Reg. 20.2010-1(c) (the anti-clawback regulation). That regulation provides, in substance, that a decedent's estate will not be taxed on gifts made during the elevated-BEA period solely because the BEA at the time of death was lower than the BEA at the time the gifts were made. The estate tax is computed using the higher of the BEA at death or the total gifts made during life, eliminating the clawback. Cite Treas. Reg. 20.2010-1(c) when advising clients on this protection.

How OBBBA changes the clawback calculus

With OBBBA permanently setting the BEA at $15 million for 2026 (confirm at IRS.gov under IRC 2010(c)) -- higher than the TCJA elevated amount for any prior year -- the practical clawback risk for clients who made gifts during 2018-2025 is substantially reduced. The permanent BEA is now higher than the prior elevated TCJA BEA for any year. This means that a client who used all available BEA in 2024 or 2025 will not face a clawback calculation producing a higher estate tax, because the BEA at death (the permanent $15 million OBBBA amount, or the inflation-adjusted equivalent for the year of death) will be at least as large as the BEA used during the gifting period.

However, practitioners should NOT simply assume the anti-clawback regulation is fully settled and requires no further confirmation. Two follow-up steps remain appropriate:

1. Confirm at IRS.gov whether OBBBA or any subsequent IRS guidance modified Treas. Reg. 20.2010-1(c). IRS administrative guidance can clarify, limit, or expand regulatory provisions; practitioners must confirm the current text of the regulation and any OBBBA-specific guidance at IRS.gov before advising clients that the anti-clawback protection applies.
2. Document prior gifts carefully. Even if the anti-clawback protection applies and no federal estate tax results from prior gifts, Form 709 reporting for all taxable gifts made during the TCJA period must be in order. Timely filed Forms 709 begin the 3-year period within which the IRS can assess gift tax; an unfiled Form 709 leaves the gift tax liability open indefinitely (with potential exceptions for adequately disclosed gifts). Ensure all taxable gifts from 2018 through 2025 are reported on filed Forms 709 and that the taxpayer has copies of all returns.

Form 709 documentation for prior gifts

For clients who made large gifts during the TCJA period, practitioners should audit the Form 709 filing record. Each taxable gift should appear on a Form 709 for the year it was made, with the BEA used reported on Schedule B (Summary of Taxable Gifts). The cumulative BEA used carries forward from year to year. For Form 706 purposes, Schedule G (Transfers During Decedent's Life) and Schedule B (Taxable Gifts Made After 1976) must reflect all prior taxable gifts. Proper documentation at both Form 709 and Form 706 stages protects the anti-clawback position and reduces audit exposure. For a practitioner guide to Form 709 preparation and GST allocation mechanics, see the AmericasTax Form 709 Gift Tax Return: Gift Splitting and GST Allocation Practitioner Guide.

Section 5: State Estate Tax Divergence -- the Critical Gap

OBBBA did not change a single state estate tax provision. Every state that had a separate estate tax before OBBBA still has it, at the same exemption level (absent independent state legislative action). The federal BEA increase widens -- not closes -- the gap between federal and state exemptions. For clients domiciled in estate tax states, or who own real property in estate tax states, the state estate tax analysis is now more important than ever, because a client whose estate clearly clears the federal bar may still owe substantial state estate tax.

The following table summarizes the major states with estate taxes as of the date of this guide. Hedge ALL state exemption amounts, rates, and cliff provisions to the applicable state tax law and current guidance from the applicable state tax agency. State exemption levels change by legislation and by annual inflation adjustment. Do not advise clients on state estate tax liability without confirming the current-year state exemption at the state's official tax agency website.

The New York cliff provision: a special planning emergency

New York's estate tax includes one of the most punishing provisions in any state tax code: the cliff. Under New York Tax Law (confirm current text at NYS Tax Law and NYS DTF guidance), if the decedent's gross estate (before deductions) exceeds 105% of the New York estate tax exemption (confirm the current NY exemption at NYS DTF; it is annually inflation-adjusted), the New York estate tax applies to the ENTIRE estate -- not just the excess over the exemption. The exemption amount provides zero benefit once the 105% threshold is crossed.

The practical result: a New York estate that is just $1 above the 105% cliff threshold faces New York estate tax on the entire estate, while an estate just $1 below the threshold faces zero New York estate tax. The marginal New York estate tax on the dollar that crosses the cliff can be many multiples of that dollar in absolute tax cost. This is not a marginal rate issue; it is a structural cliff that produces massive tax liability discontinuities.

Practitioners advising New York clients with estates near the New York exemption must:

• Determine the current NY exemption at NYS DTF. The NY exemption is adjusted annually; do not use prior-year figures.
• Compute the 105% cliff threshold. Multiply the current NY exemption by 1.05 to identify the cliff. Any estate with a gross estate above this threshold loses the full benefit of the NY exemption.
• Model the cliff carefully. For clients whose estates are between the NY exemption amount and the 105% threshold, the planning goal is to keep the gross estate below the threshold. Deathbed charitable gifts, accelerated charitable deductions, and other strategies may be appropriate to reduce the gross estate below the cliff. Hedge all cliff-planning strategies to NYS Tax Law, NYS DTF guidance, and qualified New York estate tax counsel.
• Note: the cliff is based on the GROSS estate. The gross estate for NY cliff purposes is computed before estate tax deductions (marital deduction, charitable deduction, etc.). Adding deductions after the gross estate exceeds the cliff does not avoid the cliff. The gross estate computation must be the starting point for cliff analysis.

Hedge the New York cliff calculation and the current NY exemption amount to NYS Tax Law and current NYS DTF guidance. This is not a federal rule; it is a state-specific provision that operates entirely independently of the OBBBA federal BEA increase.

Multi-state clients: domicile and situs analysis required

For clients with connections to more than one state -- whether through domicile, real property ownership, or business interests -- a multi-state estate tax analysis is mandatory. Key principles:

• Domicile state: The state in which the decedent was domiciled at death generally imposes estate tax on all property, wherever located, subject to credits for tax paid to situs states on real property and tangible personal property.
• Situs state: States with estate taxes may impose tax on real property located within the state, regardless of the decedent's domicile. A New York non-domiciliary who owns New York real estate may owe New York estate tax on that property. Hedge all situs-based taxation to the applicable state's estate tax statute and current agency guidance.
• State residency determinations: The definition of domicile and the rules for determining it vary by state and can be contested. Clients who moved to a no-estate-tax state before death should ensure the domicile change is well-documented. For a practitioner guide on state income tax residency and domicile issues, see the AmericasTax state income tax residency guide at State Income Tax Residency, Domicile, and the New York Statutory Residency Rules.

Section 6: Annual Gift Exclusion and Annual Giving Programs

The annual per-donee gift tax exclusion under IRC 2503(b) allows a donor to give up to a specified amount to any number of donees each year without gift tax liability and without reducing the donor's BEA. For calendar year 2026, the annual exclusion is $19,000 per donee (confirm the 2026 amount at IRS.gov and the applicable Revenue Procedure before use; the annual exclusion is indexed for inflation and announced annually by the IRS). OBBBA did not change the annual exclusion; it operates independently of the BEA.

The annual exclusion is a separate and additive benefit: annual exclusion gifts reduce the donor's estate without consuming any BEA. A disciplined annual gifting program can transfer significant wealth over time. For example, a married couple with four adult children and eight grandchildren (12 donees) can transfer $19,000 per donee from each spouse, for a combined annual transfer of $456,000 (12 donees x $19,000 x 2 donors; confirm the current annual exclusion at IRS.gov before computing). Over 10 years, that is $4.56 million transferred free of gift and estate tax, without using any BEA.

Gift-splitting: IRC 2513

Under IRC 2513, married couples may elect to "split" gifts: a gift made by one spouse to a third party is treated as made one-half by each spouse for gift tax purposes. This allows one spouse to use both spouses' annual exclusions for a single gift, effectively doubling the per-donee annual exclusion to $38,000 per donee per year (2026; confirm at IRS.gov and IRC 2513). Gift-splitting requires a consent election by the non-donor spouse on Schedule B of Form 709 for the year of the gift. Hedge all gift-splitting election mechanics, including the requirement for a filed Form 709 and any year-of-election limitations, to IRC 2513, the Form 709 instructions, and IRS.gov.

Direct tuition and medical payments: IRC 2503(e)

IRC 2503(e) provides an unlimited exclusion from gift tax for amounts paid directly to educational institutions for tuition and directly to medical providers for medical care. These payments are excluded from gift tax entirely -- they are not limited by the annual exclusion amount, they do not reduce the BEA, and they do not need to be reported on Form 709 (because they are excluded gifts, not taxable gifts). Cite IRC 2503(e). Key limitations:

• Tuition only, not room and board: The exclusion covers tuition payments to qualifying educational organizations; it does not cover room and board, books, or other fees. Payments must be made directly to the institution, not to the student.
• Medical care only: The exclusion covers payments for medical care (as defined in IRC 213(d)). Payments must be made directly to the medical provider, not reimbursed to the student or donee. Hedge all IRC 2503(e) exclusion mechanics, including the definition of qualified education expenses and medical care, to IRC 2503(e) and IRS.gov.

529 plan superfunding

A donor may elect to "superfund" a 529 plan by making a lump-sum contribution of up to five times the annual exclusion amount per beneficiary in a single year, with the contribution treated as made ratably over five years for gift tax purposes. For 2026, the superfunding limit is $95,000 per beneficiary (5 x $19,000; confirm the current superfunding limit at IRS.gov and IRC 529, as the limit equals 5 times the current annual exclusion; confirm the 2026 annual exclusion at IRS.gov before computing). Hedge all 529 superfunding mechanics, including the five-year election, the ratable-gift-tax treatment, and any gifts to the same beneficiary during the five-year period, to IRC 529, the applicable Revenue Procedure, and IRS.gov. The superfunding election is made on Form 709, Schedule A.

Section 7: Basis Planning -- IRC 1014 Step-Up Interaction

The interaction between the permanent elevated federal estate tax BEA and the IRC 1014 basis step-up rule is one of the most important planning considerations arising from OBBBA. Understanding this interaction requires holding two ideas simultaneously: estate tax planning often favors making lifetime gifts (to remove appreciation from the taxable estate), while income tax planning often favors retaining property until death (to obtain the basis step-up). With a $15 million BEA, many clients' estates will clear the federal bar, making the income tax consequences of the transfer strategy -- not the estate tax consequences -- the primary driver of the planning decision.

The IRC 1014 step-up: what it is

Under IRC 1014, property included in a decedent's gross estate receives a basis equal to the fair market value of the property at the date of the decedent's death (or the alternate valuation date, if elected on Form 706). If the property has appreciated since it was acquired, this "step-up" in basis to date-of-death fair market value eliminates the unrealized capital gain that the decedent held during life. When the heirs subsequently sell the property at or near date-of-death value, there is little or no capital gain to report. Cite IRC 1014. Hedge the step-up mechanics, including the alternate valuation date election and any legislative proposals that may affect the step-up, to IRS.gov; the step-up in basis has been the subject of legislative proposals in prior sessions of Congress that would have limited or eliminated it.

The carryover basis trap for lifetime gifts: IRC 1015

When a donor makes a lifetime gift, the recipient takes a carryover basis: the recipient's basis in the gifted property equals the donor's adjusted basis at the time of the gift (subject to adjustment for gift tax paid on appreciation, if applicable). Cite IRC 1015. There is no step-up to fair market value for gifted property; the unrealized capital gain that existed in the donor's hands survives the gift and is now embedded in the recipient's hands. When the recipient sells the property, the recipient recognizes the gain that has accrued since the original acquisition -- not just since the date of the gift.

This is the basis trade-off: gifting removes property from the taxable estate (which saves estate tax), but it transfers the embedded capital gain to the recipient (which costs income tax when the recipient sells). For a client whose estate is below the federal BEA (and therefore faces no federal estate tax), making a lifetime gift of appreciated property is almost always an income-tax mistake from a pure basis perspective: the gift sacrifices the IRC 1014 step-up without saving any federal estate tax.

The "estate-tax-free step-up" planning opportunity

With the OBBBA permanent BEA at $15 million per person, a much larger universe of clients can now pass their entire estate (or substantially all of it) to heirs free of federal estate tax while also obtaining the IRC 1014 step-up on all estate assets. This is the "estate-tax-free step-up": property passes at death, no federal estate tax is owed (because the estate is within the BEA), and the heirs receive all appreciated assets with a basis stepped up to date-of-death fair market value. The heirs can sell those assets immediately with little or no capital gain.

For practitioners and clients who were making lifetime gifts primarily to avoid the expected post-sunset federal estate tax on amounts above the $7 million anticipated post-sunset BEA, the OBBBA permanent BEA removes the primary motivation for those gifts. Clients with estates below $15 million who had planned to gift appreciated property to use the TCJA elevated BEA before the sunset should now reassess: retaining appreciated property until death may produce better after-tax results for the family because of the IRC 1014 step-up.

When gifting appreciated property still makes sense

The analysis changes -- and gifting appreciated property can still be the right strategy -- in the following circumstances:

• Large estates subject to federal estate tax: For estates significantly above the $15 million BEA, gifting appreciated property removes the appreciation from the taxable estate and saves estate tax at 40% on that appreciation. The estate tax savings may exceed the income tax cost of the lost step-up, particularly for assets with modest embedded gains but large expected future appreciation.
• State estate tax jurisdictions: Clients in states with lower state estate tax exemptions may still benefit from gifting appreciated property to reduce the state taxable estate, even if the federal estate tax does not apply. The state estate tax savings may justify the income tax cost of the lost step-up. This is especially true in states like Massachusetts, Oregon, and Washington, where the state exemption is far below the federal $15 million BEA.
• Recipient in a lower income tax bracket: If the recipient of a lifetime gift is in a significantly lower income tax bracket than the donor, the capital gain recognized on a future sale by the recipient may be taxed at a lower rate. The bracket differential can partially offset the lost step-up.
• Estate freeze techniques: GRATs, QPRTs, and sales to intentionally defective grantor trusts are not pure "gifts" in the IRC 1015 carryover-basis sense; their income tax and basis consequences differ. These techniques can transfer future appreciation without a simple carryover basis event, and their interaction with IRC 1014 and IRC 1015 must be analyzed separately for each structure.

Section 8: Planning Action Items and Practitioner Checklist

The OBBBA permanent BEA change requires practitioners to review every estate planning client's situation and assess whether existing plans, documents, and gifting programs need updating. The following checklist identifies the primary action items. Every step should be confirmed with the applicable IRC provision, IRS.gov guidance, and (for state-specific items) the applicable state tax agency.

• Review and update all estate planning documents. Wills, revocable trusts, irrevocable trusts, and beneficiary designations may have formula clauses keyed to the federal exemption amount (for example, a credit shelter trust funded with "the maximum amount that can pass estate-tax-free"). With the BEA now at $15 million (confirm at IRS.gov), a formula credit shelter trust could fund with $15 million at the first death, which may not be the client's intent. Review all formula clauses and update documents if appropriate.
• Evaluate portability vs. credit shelter trust strategy. With the permanent $15 million BEA, many married couples will re-evaluate whether a credit shelter trust is still necessary for federal estate tax purposes. Analyze: (1) whether GST planning favors a credit shelter trust (portability does not extend to the GST exemption); (2) whether state estate tax savings justify a credit shelter trust funded at the state exemption level; and (3) whether the surviving spouse's estate is likely to remain below the BEA without a credit shelter trust. Hedge the analysis to IRC 2010(c)(5) and applicable state law.
• File Form 706 for all recently deceased spouses. Even for estates clearly below $15 million with no federal estate tax owed, file a Form 706 to elect portability and preserve the surviving spouse's DSUE. Missing this filing leaves the DSUE on the table permanently (unless the late-election procedure of Rev. Proc. 2022-32 applies and the 5-year window has not yet expired). Hedge all Form 706 filing requirements to the current Form 706 instructions and IRS.gov.
• Perform state estate tax analysis for every estate planning client. The OBBBA federal BEA increase does not help clients in Massachusetts, Oregon, Washington, Illinois, New York, Maryland, Minnesota, or other estate tax states. The state analysis must be performed separately and is now more urgent than ever because the federal/state gap is larger. Confirm each state's current exemption at the applicable state tax agency.
• Model the New York cliff for all New York clients. Determine the current New York exemption at NYS DTF. Compute the 105% cliff threshold. Model every NY client's gross estate against the cliff. For clients between the NY exemption and the 105% threshold, analyze strategies to reduce the gross estate below the threshold. Hedge the cliff calculation and any planning strategies to NYS Tax Law, NYS DTF guidance, and qualified New York estate tax counsel.
• Revisit dynasty trust funding. The permanent elevated GST exemption (IRC 2631(c); confirm at IRS.gov) opens dynasty trust opportunities at a larger scale. For clients who have not yet fully utilized their GST exemption, evaluate whether additional contributions to a new or existing dynasty trust are appropriate. For clients with existing dynasty trusts funded at lower prior-law exemption levels, evaluate whether additional contributions can be made with remaining exemption.
• Document prior gifts and confirm anti-clawback position. Confirm that all taxable gifts made during 2018-2025 are reported on filed Forms 709. Confirm the anti-clawback position under Treas. Reg. 20.2010-1(c) by checking IRS.gov for any OBBBA guidance that modified the regulation. Ensure clients retain copies of all filed Forms 709 for Form 706 purposes at death.
• Review annual gifting programs. Confirm the 2026 annual exclusion at IRS.gov ($19,000 per donee; hedge to IRC 2503(b) and the applicable Revenue Procedure). Set up or review annual exclusion gifting programs for clients who are not already making maximum annual exclusion gifts. Confirm gift-splitting elections are properly made on Form 709 for split-gift years. Analyze IRC 2503(e) direct tuition and medical payment opportunities. Review 529 superfunding eligibility for clients with grandchildren or other younger-generation donees.
• Reassess the gifting vs. holding decision for appreciated property. For clients with estates below the $15 million federal BEA, reconsider whether planned lifetime gifts of appreciated property are still advisable in light of the IRC 1014 step-up available at death. The income tax cost of the lost step-up may outweigh the estate planning benefits for clients who no longer face federal estate tax. For clients in estate tax states, the state estate tax analysis may still support gifting; analyze separately.

Frequently Asked Questions

Related Practitioner Guides

Estate and gift tax planning under the OBBBA permanent BEA intersects with estate freeze techniques, GST mechanics, Form 706 and 709 reporting, special-use valuation, and intra-family loan strategies. The following AmericasTax guides cover closely related topics.

Disclaimer: This guide is published by Americas Tax Organization for informational purposes only and does not constitute legal, tax, or financial advice. The basic exclusion amount (BEA) stated in this guide is the calendar year 2026 amount set by OBBBA under IRC 2010(c), announced for 2026; confirm the precise amount and all future-year inflation-adjusted amounts at IRS.gov using the applicable Revenue Procedure. Federal tax law, including IRC 2010(c), IRC 2631(c), IRC 2503(b), IRC 1014, Treas. Reg. 20.2010-1(c), Rev. Proc. 2022-32, and all other provisions cited in this guide, is subject to change by legislation, regulation, and IRS administrative guidance. State estate tax exemption amounts, rate schedules, and cliff provisions are set by state law and change by legislation and annual adjustment; confirm all state amounts at the applicable state tax agency before use in any client engagement. No dollar amounts, tax rates, or exemption levels in this guide should be used in client engagements without verification at IRS.gov and the applicable state tax agency. Americas Tax Organization makes no warranty as to the accuracy or completeness of this guide. Readers should consult qualified legal, tax, and financial counsel for advice specific to their client circumstances.