One Big Beautiful Bill

Estate tax legislation makes the $15 million exemption permanent starting January 1, 2026—no year-end rush for planners this time!

The verdict is in! Estate planners WILL get time off for the December holidays this year! There will be no end-of-year scrambling to use up evaporating exemption. Instead, clients can look forward to a $15 million exemption effective January 1, 2026, indexed for inflation going forward. This legislative change comes with no expiration date. How did we get here?

Political Environment

During President Trump's first term, Congress passed the Tax Cuts and Jobs Act ("TCJA"), which, among other tax cuts, temporarily doubled the estate, gift, and GST exemptions from $5 million to $10 million, indexed from 2010. The doubled exemption was in effect from 2018 through 2025, but was scheduled to sunset at the end of 2025 in order to comply with certain requirements in the Senate.

During this period of doubled exemption, many clients and planners devised plans to use client exemptions so that they would not be lost in 2026. However, with the re-election of President Trump in 2024 and the GOP majorities in both the House and the Senate, the extension of expiring TCJA provisions, including the doubled exemption, became a legislative priority to fulfill a campaign promise, along with "no tax on tips," "no tax on overtime," and "no tax on social security." With opposition from Democrats and some fiscal conservatives, President Trump demanded that his "One Big Beautiful Bill ACT" (H.R. 1) ("OBBBA") be on his desk by July 4, 2025.

Budget Process

The House and the Senate agreed on a budget framework (H. Con. Res. 14) that allowed tax cuts of $4.5 trillion over 10 years and required $2 trillion in spending cuts over the same period. Unfortunately, the extension of the expiring TCJA provisions alone was projected to cost $4.6 trillion in lost revenues and additional interest expense over the ten-year period from 2026 through 2035. Extension of just the doubled estate, gift, and GST exemptions for that ten-year period was projected to cost $235 billion (without taking into account the additional interest expense to the government). Enactment of the promised tax cuts was going to require some creative accounting.

Current Law vs. Current Policy

In a budget bill, Congress first agrees on a budget framework that establishes how much they will "spend" on the budget bill. Think of it like sitting down with your spouse and setting a limit on how much you will spend before leaving on a trip to the grocery store. The amount authorized to be spent is measured against a budget "baseline" – the current level of spending. This year there was an unprecedented debate as to how to define that budget baseline.

Recall that in 2017, TCJA provided temporary tax relief, tax relief that was set to expire at the end of 2025. That gave rise to a discussion among representatives and senators about whether the baseline should be current law – what the law would actually be in 2026 through 2035 if no legislation were passed – or current policy – the expiring law in effect in 2025. If the baseline is current law, then the cost of the bill includes the cost of extending the TCJA tax relief. If the baseline is current policy, then the cost of making the TCJA tax cuts permanent is excluded from the cost of the bill. Both the House and the Senate ultimately determined that they would treat current policy as the baseline against which the cost of the budget bill would be measured.

Of course, when TCJA was passed, its expiration date was not on account of a lack of enthusiasm in Congress for its substantive provisions. The legislation was given an expiration date because of its budget impact in later years. The bill did not "pay for" permanent tax cuts by either raising other taxes or cutting spending, therefore these cuts were enacted to be in effect for only 8 years.

If the baseline is current policy, that current policy includes the TCJA provisions. That's like saying that when I go to the grocery store this week and put milk and ice cream in my cart, I don't have to pay for milk and ice cream this week because I bought those items last time I came to the store.

Using current policy as the baseline allowed Congress to make permanent TCJA provisions without dipping into the $4.5 trillion in tax cuts authorized in the budget framework. This maneuver then made it possible for Congress to spend the amount authorized in the budget framework on other tax cuts (such as no tax on tips and no tax on overtime). While using current policy as the baseline allowed Congress to pass the bill and stay within the budget resolution, it should be clear that making the TCJA provisions permanent will in fact increase the federal deficit.

Having cleared that hurdle, the House of Representatives on May 22, 2025, voted 215 to 214, to pass the bill. Nearly all Republicans in the House, and none of the Democrats, voted in favor of the bill.

The Byrd Rule

The Senate has its own procedural hurdles. Most bills face the possibility of a filibuster in the Senate. Any one Senator can filibuster a bill, and it takes a 60-vote majority to end a filibuster. Thus a filibuster is an effective stalling technique that can encourage compromise in order to move forward.

Budget reconciliation bills are not subject to filibuster. They can pass with a simple majority. However, budget reconciliation bills are subject to the Byrd Rule. The Byrd Rule, named for former Senator Robert Byrd of West Virginia, and first adopted in 1985, requires reconciliation bills to be focused on fiscal issues, subjecting nonbudgetary provisions, so-called "extraneous material," to a "point of order" which can be raised by any one senator.

Once a point of order is raised, the Senate's Parliamentarian weighs in on whether the material is extraneous. If it is ruled to be extraneous, the material is stricken from the bill unless the objection is waived by a 60-vote majority.

A provision is extraneous if it meets at least one of six definitions in Section 313(b)(1) of the Congressional Budget Act of 1974:

The Senate Parliamentarian is Elizabeth MacDonough. She is a lawyer who joined the office of the Senate Parliamentarian in May 1999 and became Parliamentarian in 2012.

The Parliamentarian has been asked to consider points of order with respect to several provisions in the One Big Beautiful Bill Act. Here are few examples of provisions that the Parliamentarian found not to comply with the Byrd Rule:

• A carve out from the increased college endowment tax exempting religious schools from the tax
• A certification program for the earned-income tax credit
• Increased penalties for disclosing taxpayer information
• The short name of the bill (One Big Beautiful Bill Act)

In this instance, all provisions that the Senate Parliamentarian determined to be non-compliant with the Byrd Rule were either stricken from the bill or modified to comply.

On July 1, 2025, the Senators voted 51-50 to approve a modified version of the bill, with Vice President Vance breaking the tie and casting the deciding vote for passage. Three Republican Senators voted no: Senator Susan Collins of Maine, Senator Thom Tillis of North Carolina, and Senator Rand Paul of Kentucky. By earlier agreement, rather than appointing a conference committee, the Senate bill itself was returned to the House and voted on without amendment. While it took a few days to muster the required votes, the final vote was 218 to 214 with only Republicans voting in favor of the bill. Republicans Thomas Massie of Kentucky and Brian Fitzpatrick of Pennsylvania joined House Democrats in voting against the bill.

President Trump signed the bill on July 4. The final bill cuts taxes by $4.5 trillion over a decade, cuts spending by $1.7 trillion (including a 12% cut to Medicaid), and includes $450 billion in increased spending. The bill will add $3.4 trillion to the federal debt according to Congressional Budget Office estimates, $4.1 trillion if the interest that will need to be paid to debt holders is included.

Estate, Gift, and GST Provisions

As noted at the outset, the bill increases the estate, gift, and GST exemptions to $15 million as of January 1, 2026. The provisions on estate, gift, and GST taxes in the House and Senate bills are identical. One point of curiosity with respect to this provision is why Congress increased the exemption to $15 million rather than simply extend the TCJA provision. Had the bill eliminated the sunset date for the TCJA provision, the inflation-adjusted exemption amount would have been around $14.3 million for 2026.

Although I have seen no official explanation for the increase to $15 million, there are a few possible explanations. First, section 2010(c)(3)(A) of the Internal Revenue Code ("Code") still says that the basic exemption amount is $5 million. Code section 2010(c)(3)(C), added by TCJA, temporarily increases the $5 million to $10 million. OBBBA eliminates Code section 2010(c)(3)(C) and changes the $5 million in Code section 2010(c)(3)(A) to $15 million. That has the effect of simplifying Code section 2010. It also makes it look like Congress has made a very substantial increase in the exemption amount (from $5 million to $15 million), when the actual increase was about $700,000 (not that $700,000 is insubstantial). Second, there is also simplification by moving the base year for indexing from calendar year 2010 to calendar year 2026. Finally, when using a current policy baseline, it is possible that making current law permanent without any changes could be subject to a Byrd Rule challenge in the Senate as a provision with no revenue impact. By enacting an actual increase in the exemption level, that potential basis for challenge would be eliminated.

Other Provisions in OBBBA

While a full discussion of the tax provisions in OBBBA is beyond the scope of this writing, a few of the provisions that have an impact on high-net-worth individuals and charities deserve a mention.

The availability of the exclusion of capital gain on Qualified Small Business Stock ("QSBS") (Code section 1202) has been expanded in several ways under OBBBA. Most of these changes are effective in 2026. Under current law, to qualify as "small" the value of the gross assets of the corporation cannot exceed $50 million immediately after the issuance of the stock. Under OBBBA, that value is increased to $75 million and indexed for inflation. Under current law, the exclusion is the greater of $10 million or 10 times the aggregate adjusted bases of QSBS issued by the corporation and disposed of by the taxpayer during the year. Under OBBBA, the $10 million in that provision is increased to $15 million and indexed for inflation. Finally, under current law there is a required 5-year holding period. Under OBBBA the QSBS benefits can be obtained after a 3-year holding period for stock acquired in 2026 or later.

There are several provisions in the bill that impact individuals' deductions for charitable contributions. The charitable contribution deduction for non-itemizers is increased to $1000 per person or $2000 on a joint return. On the other hand, for itemizers, the charitable contribution deduction will be subject to a 0.5% floor; until the charitable contributions exceed 0.5% of adjusted gross income ("AGI"), the contributions are non-deductible. For example, if the taxpayer has AGI of $1,000,000, the first $5,000 of their charitable contributions cannot be taken as a deduction. Finally, the AGI limitation for an individual's cash contributions to public charities is permanently increased to 60%.

The final bill did not raise the net investment income tax applicable to private foundations. It did, however, increase the tax on the income of the endowment funds of certain private colleges and universities. The tax applies only to universities with over 3000 tuition paying students. The tax ranges from 1.4% to a top rate of 8% (depending on a calculation of per student endowment). Contrary to regulations promulgated by the IRS, net investment income for this purpose will include interest received on student loans and "federally-subsidized royalty income," income received with respect to patents, copyrights, or other intellectual property if any federal funds were used in the research, development, or creation of the intellectual property.

The bill also temporarily (through 2029) increases the cap on the deduction for state and local taxes from $10,000 to $40,000 (with a 1% increase in each subsequent year). The increase, however, will not benefit most high net worth individuals because it is phased out for taxpayers with modified adjusted gross income in excess of $500,000. Likewise, high net worth individuals will not be able to exclude tips or overtime pay from their income. Those temporary provisions are phased out for married persons filing jointly with modified adjusted gross income in excess of $300,000 and expire for everyone at the end of 2028. In better news for high-net-worth individuals, the provision that would have eliminated the benefit of the pass-through entity tax ("PTET") work around was dropped from the Senate version of the bill.

Repeal Is Not in the Bill

Notably repeal of the estate and GST taxes was not included in OBBBA. While a freestanding repeal bill introduced in both the House (H.R. 1301) and the Senate (S. 587) earlier this year garnered a record number of sponsors, that provision was not included in the bill. It would not be surprising to see additional proposals for full repeal in future years.

While some commentators expect a full repeal proposal to be accompanied by either realization of capital gains at death or a carry-over basis rule, neither OBBBA nor the freestanding repeal bills have required that offset.

Conclusion

For estate planners, OBBBA offers a level of certainty that we haven't had in decades by enacting an estate, gift, and GST exemption that doesn't come with an expiration date. The increased exemption to $15 million indexed for inflation will likely have little impact on the number of estates that actually pay estate tax, as any decedents who might fall below the tax threshold will likely be replaced by others whose wealth increases faster than the rate of inflation. The Joint Committee on Taxation estimates the one-year (fiscal year 2027) revenue loss from this provision alone at just under $1 billion as compared to simply extending the TCJA provision, and $20.3 billion as compared to allowing the doubling of the exemption under TCJA to expire at the end of this year. Either of those numbers is a small portion of the revenue lost under OBBBA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.