As 2025 draws to a close, we reflect on this year’s key developments that will affect gift and estate tax planning in 2026 and beyond. The most significant development was the passing of the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) on July 4, which extended – and in some cases enhanced – key provisions of the Tax Cuts and Jobs Act (TCJA). Additionally, finalized regulations and recent court decisions provide useful guidance. Below is a summary of the changes and the corresponding planning opportunities.
Higher exemptions
OBBBA permanently increased the gift, estate and generation-skipping transfer (GST) tax exemptions to $15 million per person in 2026, with annual inflation adjustments thereafter. This represents a roughly $1 million increase from 2025. High-net-worth individuals should consider using this additional amount through lifetime gifts, as even “permanent” provisions can be changed by future legislation.
Lifetime gifts not only use the available exemptions but also remove future appreciation from an individual’s taxable estate. The impact of lifetime giving can be enhanced by giving hard-to-value assets, such as closely held business interests, which may qualify for valuation discounts under current law.
Using trusts for income tax planning
As gift and estate tax exemptions grow, income tax planning becomes increasingly critical. Non-grantor trusts, which are treated as separate taxpayers, can be used to optimize both the state and local tax (SALT) deduction and qualified small business stock (QSBS) gain exclusion. Both provisions were favorably modified by OBBBA.
Maximizing the SALT deduction
The OBBBA temporarily increased the cap on SALT deductions to $40,000 ($20,000 for married filing separately). This deduction begins to phase down for taxpayers with modified adjusted gross income in 2025 exceeding $500,000 ($250,000 for married filing separately). Beginning in 2026, both the cap and the phase-down thresholds increase by 1% annually through 2029. The cap reverts back to $10,000 in 2030.
Because each non-grantor trust is entitled to its own SALT deduction, individuals can multiply the deduction by creating multiple non-grantor trusts. For example, a person with three children could transfer real estate interests into three separate non-grantor trusts, one for each child, and effectively triple the SALT deduction. This strategy may also help avoid the thresholds that trigger phasedowns. Consider, however, that the increased SALT deduction is set to expire at the end of 2029, which could make this strategy less appealing for some taxpayers.
For stock acquired after the OBBBA’s enactment, the per-issuer QSBS gain exclusion increases to $15 million, and the gross asset cap increases to $75 million for stock issued after enactment. Starting in 2027, both limits will be adjusted for inflation.
Taxpayers may consider making a gift of QSBS to separate non-grantor trusts to multiply the available exclusion. Alternatively, taxpayers wishing to avoid a taxable gift may use an incomplete gift, non-grantor trust (ING trusts). These trusts, frequently formed in Nevada and Delaware, are commonly used for state income tax planning. Note that some states, including New York and California, have passed anti-ING legislation. In those jurisdictions, the non-grantor trusts must be completed gift trusts.
Caution: Multiple trust rule.
When establishing multiple non-grantor trusts, bear in mind the multiple trust rule of IRC section 643(f), which permits the Treasury to treat multiple trusts as a single trust if:
The trusts have substantially the same grantor(s) and beneficiary(s), and
The principal purpose of the trusts is tax avoidance.
Itemized deduction limitations
The OBBBA permanently repealed the former “Pease limitation” but introduced a new 2/37 limitation, which effectively limits the tax benefit of itemized deductions for high earners to 35% beginning in 2026. Notably, the new rule also repealed IRC section 68(e), which exempted estates and non-grantor trusts from itemized deductions limitations. As a result, estates and non-grantor trusts are now arguably subject to the 2/37 limitation on itemized deductions, such as the IRC section 642(c) charitable deduction and the IRC section 691(c) deduction for estate taxes paid on income in respect of a decedent (IRD).
Interpretations vary as to whether the new rule applies to estates and non-grantor trusts. To mitigate potential exposure, taxpayers may consider accelerating charitable contributions into 2025 and leaving traditional Individual Retirement Accounts (IRAs), which are generally IRD to the beneficiaries, directly to charity.
Reporting gifts and bequests from covered expatriates
On Jan. 10, 2025, the IRS issued its final covered gift and bequest regulations under IRC section 2801, which imposes a tax on U.S. citizens or residents who receive a covered gift or bequest from a covered expatriate. The tax is calculated based on the value of the gift or bequest, multiplied by the highest estate tax rate at the time of receipt. Currently, the highest estate tax rate is 40%. Similar to an inheritance tax, this tax is imposed on the US recipient of the gift or bequest.
A “covered gift” or “covered bequest” refers to property acquired, directly or indirectly, by a U.S. recipient from a covered expatriate. Generally, a “covered expatriate” is someone who relinquished their U.S. citizenship and met any of the following criteria:
Tax liability test: Their average annual net income tax for the five taxable years preceding expatriation exceeded the applicable threshold (i.e., $206,000 in 2025). This amount is indexed for inflation.
Net worth test: Their net worth as of the expatriation date was $2 million or more.
Tax certification test: They failed to certify to the IRS on Form 8854 that they complied with all U.S. federal tax obligations for the preceding five years.
Notably, the recipient of the gift or bequest is responsible for determining whether the person making the transfer is a covered expatriate and whether the transfer is a covered gift or bequest.
Reporting covered gifts and bequests has been delayed pending the IRS providing the appropriate form. Just recently, the IRS released a draft Form 708. Once this form is finalized, reporting will be required.
Bona fide intra-family loans
On April 1, 2025, the Tax Court issued a taxpayer favorable decision in the Estate of Barbara Galli v. Commissioner, upholding a $2.3 million loan between mother and son. The transaction was supported by a signed promissory note payable over nine years at the appropriate applicable federal rate (AFR). The court determined the transaction was a bona fide loan, not a disguised gift, because the parties observed formalities: the borrower paid interest each year, the lender reported interest income, and the indebtedness was evidenced by a signed promissory note. The fact that the note was discounted on the lender’s estate tax return was not an admission of a gift.
This case reinforces that adherence to certain formalities is essential for intra-family loans to be treated as bona fide debt obligations. Courts will evaluate several factors, including whether there is:
Evidence of indebtedness,
Adequate interest charged,
Security or collateral,
A fixed maturity date,
Demand for repayment,
Actual repayment,
An ability to repay,
Appropriate records reflecting the transaction, and
Consistent federal tax reporting.
Satisfying as many of these factors as possible helps to avoid the presumption that transfers among family members are gifts.
Strict compliance for portability elections
In the Estate of Billy S. Rowland v. Commissioner (July 5, 2025), the Tax Court disallowed the deceased spouse’s unused exclusion (DSUE) claimed by the surviving spouse’s estate. The court concluded that the first decedent’s estate tax return was not complete and properly prepared; thus, the portability election was invalid.
The executor of the first estate reported estimated asset values rather than fair market values. While Treasury regulations allow the use of estimated values for assets passing entirely to the surviving spouse or charity on portability only returns, this does not apply if the value of the property is needed to determine the value passing to other beneficiaries. Because 55% of the residue of the first decedent’s estate passed to non-spousal and non-charitable beneficiaries, the estate was not eligible to report estimated values.
Executors filing for portability should be aware that strict compliance with the rules and regulations is required and, in some cases, full valuations of property may be necessary, particularly if there are percentage-based bequests.
Please reach out to a Baker Tilly advisor if you have questions about this topic or how it might impact your tax position.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
