Estate Tax ‘Permanent’ Exemption Misleads Wealthy Families

The most dangerous word in American estate planning is not “tax.” It is not “exemption.” It is not even “death.” It is “permanent.”

Congress deployed that word with calculated precision last summer when it enacted the One Big Beautiful Bill Act (OBBBA), and in the quiet weeks that followed, a curious thing happened across the country: planning meetings were canceled, documents were shelved, and the collective urgency that had gripped the estate planning profession for nearly three years simply evaporated.

The most dangerous word in American estate planning is not "tax."

The relief was entirely understandable. For most of the preceding period, the industry had been operating under a hard deadline. The doubled estate exemption introduced by the Tax Cuts and Jobs Act (TCJA) was scheduled to sunset at the end of 2025, and families with substantial wealth were counseled—correctly, under the law at the time—to compress years of transfer planning into a matter of months. The arithmetic was unforgiving: miss the window, and the exemption would fall from roughly $14 million to a pre-TCJA baseline of around $7 million, potentially exposing millions in assets to a 40% tax.

Then the deadline vanished. And with it, for many families, the last practical motivation to reopen the estate binder.

The New Numbers: What OBBBA Actually Changed

On July 4, 2025, President Donald Trump signed OBBBA into law, fundamentally resetting the estate planning landscape. The estate, gift, and generation-skipping transfer tax exemption was set at $15 million per individual for 2026—or $30 million for married couples—up from $13.99 million and $27.98 million, respectively, in 2025. The legislation also provides for inflation adjustments beginning in 2027, using 2025 as the base year. The top federal rate remains 40%.

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The 2026 annual gift tax exclusion is $19,000.

For the great majority of Americans with substantial wealth—households with net worth between roughly $5 million and $30 million—the federal estate tax has effectively receded as a planning concern. It is no longer the binding constraint that once dictated the structure of trusts, the timing of gifts, and the disposition of appreciated assets.

But here is the uncomfortable truth that the word “permanent” obscures: in tax legislation, that word is a term of art. It signals that Congress has chosen not to include a scheduled expiration in the statute—nothing more. A future Congress remains entirely free to revise the number at any time, and the historical record suggests it does so with unsettling regularity.

Consider the trajectory. In 2001, the federal estate tax exemption stood at $675,000. By 2002, it had risen to $1 million. In 2009, it reached $3.5 million. In 2010, the estate tax was briefly repealed altogether—then reinstated at $5 million in 2011. The TCJA doubled that figure to $11.18 million in 2018, and it drifted upward with inflation to its pre-OBBBA level.

Against that record, “permanent” is a description of legislative posture, not of statutory reality. And the behavioral response most families adopt on hearing the word—read the news, exhale, close the binder—is precisely the wrong one.

Why a Higher Exemption Can Break an Existing Plan

The most immediate risk is not to families who have done nothing. It is to families who have done something—and whose carefully constructed plans may now operate in ways they never intended.

Many trusts drafted during the preceding decade contain formula clauses: provisions that automatically allocate assets between a credit-shelter share and a marital share based on the exemption in effect at the first spouse’s death. These clauses were written to respond dynamically to changes in the law—a feature that was supposed to provide flexibility and certainty.

But a formula written to divide an estate at a $5 million or $7 million threshold behaves very differently at $15 million. In some drafting patterns, the credit-shelter share now consumes nearly the entire estate and starves the surviving spouse’s marital share. In others, the reverse occurs. Neither outcome may reflect what the family actually intended when the documents were signed.

The remedy is unglamorous: read the formula language, model the outcome under current law, and amend or restate where the mechanics no longer serve the intent. This is not a task for the faint of heart, nor one that can be deferred indefinitely. The documents will continue to function regardless—they just may not function in the family’s favor.

Question One: What Happens to Formula Clauses at $15 Million?

The answer to this first question is the foundation on which everything else rests. Every estate plan is, at its core, a set of instructions for how assets will be divided, managed, and distributed. Formula clauses are the mechanisms that make those instructions dynamic—and dynamic mechanisms can produce unintended results when the underlying variables change dramatically.

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For families with estates in the $5 million to $15 million range, the OBBBA exemption increase has likely moved their entire estate into the credit-shelter share, leaving nothing for the marital share. That may be perfectly acceptable for families who want to maximize generation-skipping and minimize estate tax at the second spouse’s death. But it can create significant problems if the surviving spouse needs the income or principal from the marital share to maintain their standard of living.

Conversely, some drafting patterns allocate based on a percentage of the estate rather than a fixed dollar amount. These clauses may have been designed to handle exactly this kind of change—but they may also produce outcomes that surprise the family, particularly if the percentage allocations were set years ago under different assumptions about the family’s wealth trajectory.

The only way to know is to look. And in our experience, most families have not looked.

Question Two: Should Appreciated Assets Stay or Go?

This question inverts a decade of planning orthodoxy. Under the pre-OBBBA regime, the arithmetic favored removing appreciated assets from the estate—through outright gifts, sales to intentionally defective grantor trusts, or grantor retained annuity trusts—to avoid a 40% estate tax that would otherwise apply at death.

That calculus was often correct. But under a permanent $30 million exemption, it frequently is not.

For families comfortably beneath the threshold, retaining appreciated assets in the estate captures the basis step-up permitted at death, which eliminates embedded capital gain from a lifetime of appreciation. The mechanics are straightforward: when an asset is passed to heirs at death, its tax basis is stepped up to its fair market value, so the heirs pay no capital gains tax on the appreciation that occurred during the original owner’s lifetime.

If instead the asset was gifted during life, the heirs inherit the original owner’s basis—and pay capital gains tax on the appreciation when they sell. A 23.8% federal capital gains rate applied to decades of unrealized growth can now exceed the estate tax cost of holding the asset—often by a substantial margin.

The old default of “give it away” deserves a fresh calculation. For many families, the answer will now be to hold assets and allow them to pass to heirs at death, taking advantage of the basis step-up that the tax code provides. But this is not a universal rule; it depends on each family’s specific asset mix, their projected growth rates, and the likelihood that the exemption will remain at current levels.

Question Three: What About State Estate Taxes?

The federal exemption increase has not touched the state estate tax landscape, and this is where the federal certainty can dissolve quickly. Several states levy their own estate tax at thresholds far below the federal exemptions, and additional jurisdictions impose inheritance taxes on the recipient rather than the estate.

• Oregon begins taxation at $1 million
• Massachusetts at $2 million
• Washington at approximately $3 million
• New York at $7.35 million, with a distinctive cliff at 105% of exemption above which the entire estate becomes taxable from the first dollar

Our practice, Palmer Wealth Group, is based in Texas, which imposes no state estate tax—a genuine planning advantage for its residents. But the analysis rarely stays clean. Property held in another state, family members domiciled elsewhere, or a beneficiary residing in an inheritance tax jurisdiction can each trigger exposure the federal calculation misses entirely.

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State thresholds change more frequently than federal, and several states index their exemptions annually. What was safe last year may not be safe this year. A family that owns a vacation home in Oregon or a rental property in Massachusetts may be surprised to learn that their estate, though comfortably below the federal exemption, exceeds the state threshold and exposes their heirs to a significant tax bill.

Question Four: How Have Trust Strategies Shifted?

The fourth question addresses what existing trusts have quietly become under the new law. When the federal estate tax was the binding constraint, the goal of an irrevocable trust was often to remove assets from the grantor’s estate as efficiently as possible. Income taxation was a secondary concern—a price worth paying to avoid the far larger estate tax.

It is no longer.

Now, a trust reaches the top 37% federal income tax bracket at $16,000 of undistributed income in 2026—a threshold a single individual does not encounter until $640,600 of taxable income. For a trust with meaningful investment assets, the compression is severe.

Distributable net income planning, grantor-trust elections, situs selection, and the choice between distributing and accumulating income each become materially more important once the estate tax rationale no longer overwhelms every other consideration.

A trust that was perfectly designed to minimize estate tax may now be a liability from an income tax perspective. Grantor trusts, which are typically disregarded for income tax purposes, may need to be restructured. Trusts that accumulate income may need to shift to distribution strategies. And the choice of trust situs—which state’s laws govern the trust—can have significant tax implications that were previously irrelevant.

What an Estate Plan Review Actually Looks Like

Taken together, these four questions form the shape of an estate plan review that addresses three distinct components:

• Documentary. Retrieve the current trust and will documents and read the formula clauses aloud. The exercise is more revealing than most families expect. The language may say one thing; the family’s intent may say another.
• Arithmetic. Re-inventory the estate against the new estate tax threshold, separating what remains a candidate for lifetime transfer from what has quietly become a candidate for basis step-up. This is not a one-time calculation; it needs to be revisited as asset values change.
• Geographic. Identify every state in which the family owns real property, maintains a domicile, or has significant beneficiaries, and map the exposure against current state statutes.

There is a fourth component, and it is, in some respects, the most difficult. It is coordinative. Estate planning, tax planning, and investment management sit on three separate professional desks, plus a personal one: the attorney drafts the documents, the accountant computes the return, the adviser manages the assets—and the family too often serves as the unpaid coordinator among them.

In our practice, the review typically begins with the attorney reading the formula clauses in the family’s presence and ends with the accountant and the investment adviser at the same table, working from the same current inventory. The mechanics are ordinary; the coordination is not. And its absence—not the tax code—is what most often causes an updated plan to remain uncompleted after the review begins.

The Real Danger Is Not the Law—It Is the Complacency

Nothing in the current law prevents a future Congress from changing the exemption again. The 40% rate, the state estate tax landscape, and the compressed income tax brackets that apply to trusts all remain what they were before OBBBA. What has changed is the immediacy of the pressure to act.

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That change is welcome. It gives families the luxury of time—time to think, time to model, time to coordinate. But it should not be mistaken for a change in the underlying discipline.

The families who will fare best in the coming decades are not necessarily those with the most sophisticated trusts or the most aggressive tax strategies. They are the families who treat estate planning not as a project to complete but as a process to maintain. They review their documents when the law changes, when their assets change, and when their family circumstances change. They keep their attorney, accountant, and adviser in the same room, working from the same information.

Estate planning is not the practice of racing deadlines. It is the practice of building a plan that survives whatever the rules become next. And the families who understand that will be the ones who prosper—not because they found the perfect trust, but because they refused to believe that any tax provision, however labeled, was truly permanent.