Estate planning can be an emotional and complex process. These challenges are often made more difficult by the evolving landscape of tax legislation, particularly in relation to the federal estate and gift tax system. Understanding how these taxes work is essential for individuals and families looking to structure their estate plans effectively.
A key feature of the federal estate and gift tax system is that it operates under a unified exemption. This means that the exemption amount applies to both taxable gifts made during life and transfers at death. When an individual makes large taxable gifts during their lifetime, those gifts reduce the amount of exemption available to shield assets from estate tax at death. For example, if a person uses $5 million of their exemption during life, only the remaining portion will be available for use at death.
The gift tax applies to transfers of property made during life where nothing, or less than full value, is received in return. However, certain transfers are excluded. An individual may make unlimited gifts to their spouse during life without using any portion of their exemption. In addition, annual exclusion gifts up to $19,000 per recipient in 2025 do not count against the lifetime exemption. These annual gifts can be an effective way to transfer wealth gradually while preserving the full amount of the unified exemption.
Over the last decade, the exemption amount has changed multiple times as a result of legislative action. The American Taxpayer Relief Act of 2012 set the estate and gift tax exemption at $5 million, indexed for inflation. In 2017, the Tax Cuts and Jobs Act temporarily increased the exemption to $11.2 million, also indexed for inflation. That increase was scheduled to sunset at the end of 2025, at which point the exemption would revert to the $5 million baseline set in 2012, adjusted for inflation.
The One Big Beautiful Bill Act, enacted as Public Law 119-21, made several significant changes to this structure. It permanently set the unified federal estate and gift tax exemption at $15 million per individual, indexed for inflation. This amount is in addition to the annual gift tax exclusion, which remains unchanged. As a result, beginning in 2026, a married couple may have a combined exemption amount of $30 million for taxable transfers made during life or at death.
The law also preserved the concept of portability. Portability allows a surviving spouse to use any portion of the exemption that was not used by the deceased spouse. For example, if a deceased spouse used only $5 million of their $15 million exemption during life or at death, the surviving spouse may add the remaining $10 million to their own exemption, resulting in a total exemption of $25 million.
Perhaps the most important aspect of the One Big Beautiful Bill Act is that it makes the exemption amount permanent. Unlike the temporary increases in prior legislation, this law does not contain a sunset provision. Any future change to the exemption would require new legislation passed by both houses of Congress and signed by the President. This legislative stability creates greater certainty for individuals and families seeking to engage in long-term estate planning.
This post was prepared by Summer Associate Makayla Mostek, a law student at the University of Iowa, and edited by Andrew Johnston.