Estate Tax Planning & The One Big Beautiful Bill Act
By Lisa Counsell and Jeanne Blackmore
Prior to the enactment of OBBBA, the federal estate tax exemption was $13.9 million per person. The $13.9 million exemption amount was subject to the so-called Byrd rule, which generally requires a federal tax statute that increases the deficit to sunset periodically unless extended by Congress. Under OBBBA, rather than extending the exemption, Congress permanently codified a $15 million per person federal estate tax exemption (adjusted annually for inflation).
Before OBBBA, Trust Company of Vermont (along with other estate and financial planners) would periodically scramble to help clients utilize their unused federal exemption in anticipation of the exemption sunsetting and reverting to a much lower amount. Now that OBBBA has made the $15 million federal exemption permanent, it is tempting to breathe a sigh of relief. Not so fast! There are two big reasons to keep your eye on estate tax planning: state estate taxes and potential future federal tax increases.
State Estate Taxes
Twelve states and the District of Columbia have state-level estate taxes, and these often are significantly more onerous than the federal estate tax. Consider Vermont’s estate tax, where a 16% tax is due on amounts in excess of $5 million. If an unmarried Vermont resident passes $16 million of assets to heirs, a federal estate tax of $400,000 will be due and a Vermont estate tax of $1,760,000 will be due. Ouch!
To make things more complicated, most states do not provide for portability of one spouse’s unused exemption to the surviving spouse. Thus, in the case of a married couple, their estate plan must be structured to make sure each spouse uses his/her state estate tax exemption on death or else it will be permanently lost.
Importantly, state estate tax exposure can be mitigated or eliminated with planning. For example, in many states, like Vermont, estate tax can be avoided through lifetime gifting. Our colleagues have recently written several wonderful articles on these tax planning strategies, including the use of Spousal Lifetime Access Trusts (SLATs), Intentionally Defective Trusts, Roth conversions, transfers of income-producing property, and charitable giving.
Future Federal Tax Increases
There is no knowing what tax policies a future administration may adopt. New tax laws could be enacted to increase income and estate tax rates and generate revenue to address a ballooning deficit. For this reason, we recommend clients take advantage of the current favorable tax environment to maximize strategies that shelter assets from income and estate taxes. Such strategies include converting regular retirement accounts to Roth accounts (to maximize income tax-free growth of retirement assets) and gifting assets to irrevocable trusts (to shelter assets from estate tax). Thanks to our expansion into New Hampshire, if Trust Company of Vermont serves as trustee of an irrevocable trust, that trust may take advantage of New Hampshire’s favorable laws allowing trusts to shelter assets from estate tax for future generations indefinitely.
While the OBBBA’s “permanent” $15 million federal estate tax exemption does not free you from the need to consider estate tax planning, it does make that planning easier because a larger federal exemption gives you more flexibility. There is no guarantee to what extent these strategies will be available in the future, so we recommend you consider whether it would benefit you to take advantage of them now.