At a $15 million exemption, what is estate planning even for?

The 2026 federal estate tax exemption appears to stand at $15 million per person under Public Law 119-21, made permanent and indexed for inflation after that year. For most families the question is no longer whether there will be a federal estate tax bill. It is what happens to basis, who controls what, and whether anything has to clear probate.

The exemption covers more estates than it used to

The federal estate tax exemption for deaths in 2026 appears to be $15 million per individual, or $30 million for a married couple, under Public Law 119-21, the Working Families Tax Cuts Bill. That figure reflects the amount set by Section 2010 of the Internal Revenue Code after the statutory change and indexing. An estate below that threshold pays no federal estate tax. An estate above it pays tax on the excess at a top rate of forty percent.

The exemption has been above $10 million since 2018. The number of estates that file a return has dropped accordingly. Whether any particular estate crosses the threshold depends on the assets and the year, but the share of deaths that trigger a filing requirement is now well under one percent.

Public Law 119-21 struck the provision that would have caused the exemption to revert to $5 million indexed for inflation on 1 January 2027. The $15 million figure is now permanent, subject to annual inflation adjustments. Whether Congress changes it in the future is a matter of legislation, not a scheduled sunset.

Even at the current figure, federal estate tax remains a concern only for estates at the top of the wealth distribution. What that means is that families with estates under the exemption no longer face a federal estate tax problem. The planning they need addresses something else.

Basis is binding where estate tax is not

Section 1014 of the Internal Revenue Code provides that property acquired from a decedent generally receives a basis equal to its fair market value at the date of death. This is the basis step-up. An asset bought for $100,000 and worth $1 million at death passes to the heir with a $1 million basis. If the heir sells it the next week for $1 million, there is no capital gain and no tax due.

The step-up applies to assets that pass through the estate or by operation of law at death. It does NOT apply to assets given away during life. A gift carries over the donor's basis. The same $1 million asset given to a child while the parent is alive carries the $100,000 basis with it. If the child sells it for $1 million, they report a $900,000 capital gain.

So the decision is this. A family with $10 million in appreciated property and no estate tax exposure can give it away now, eliminate it from the estate, and transfer the built-in gain to the recipient. Or they can hold it until death, pay no estate tax because the estate is under the exemption, and deliver it to the same recipient with a stepped-up basis that eliminates the gain. The estate tax outcome is identical. The income tax outcome is not.

Where the exemption is high enough that no estate tax is due either way, holding an appreciated asset until death may deliver a better result. The estate bears no tax and the heir receives the asset without the gain. That is a planning outcome, and it is the opposite of the one that made sense when the exemption was lower and lifetime gifts were the primary strategy for avoiding estate tax.

Does a trust still do anything if there is no estate tax?

A revocable trust created during life and funded with the grantor's assets does not reduce estate tax. The trust assets are included in the taxable estate at death under Section 2038 because the grantor retained the power to alter or revoke. The trust also does not change the income tax treatment during the grantor's life. It is disregarded for income tax purposes, so all income is reported on the grantor's own return.

What the trust does accomplish is this. It holds title to the assets, names a successor trustee to manage them at the grantor's death or incapacity, and directs their distribution according to the terms written into the trust document. The assets in the trust do not pass through probate because title is already held by the trustee. The trust continues without interruption, and the named beneficiaries receive what the trust directs without a court proceeding.

Probate is a public process that takes time, costs money, and involves court supervision of asset distribution. The cost and delay vary by state, but in most cases a revocable trust that is properly funded avoids probate entirely. For a family with no estate tax exposure, that is the primary reason to use one. The second reason is control over timing and conditions. A trust can hold assets for minor children, make distributions over time rather than in a lump sum, or impose conditions that a simple will cannot enforce after the assets are distributed.

So the answer is yes, a trust does something. It addresses probate, management at incapacity, privacy, and control over distributions in ways that matter independently of estate tax.

What about state estate tax?

A number of states and the District of Columbia impose their own estate or inheritance tax, and their exemptions are generally far lower than the federal figure. The threshold varies by state. Whether state estate tax applies depends on where the decedent was domiciled, where real property is located, and which state's law governs.

A family with $8 million in assets and a domicile in a state with a low exemption has no federal estate tax exposure but may owe state estate tax on the amount above that state's threshold. The same family in Florida pays no state estate tax because Florida does not impose one. For someone who lives in a state with its own estate tax, that tax may be the binding constraint, and planning to address it may be justified even where federal estate tax is not a concern.

State law also governs probate. Some states have streamlined processes for smaller estates, others do not. The cost and duration of probate in one state is not the same as in another. Whether avoiding probate matters enough to justify a trust depends in part on the state where the assets are located and where the estate will be administered.

Control and creditor protection

A trust that continues after distribution can impose limits on how and when the beneficiary accesses the assets. A discretionary trust gives the trustee authority to make or withhold distributions based on the beneficiary's circumstances. A spendthrift provision prohibits the beneficiary from assigning their interest and, in many states, prevents creditors from reaching the trust assets to satisfy the beneficiary's debts.

This matters where the concern is not tax but something else. A child with creditor issues, a divorce, a substance problem, or simply poor financial judgment. A beneficiary who is a minor or who has special needs and receives government benefits. A second marriage where the goal is to provide for a surviving spouse without disinheriting children from a prior marriage. These are not tax problems, and the exemption level does not change whether they need to be addressed.

The trust that solves these problems is irrevocable, at least as to the beneficiary's interest, and its terms are drafted to prevent the beneficiary from being treated as the owner of the assets. Whether that structure is appropriate depends on facts specific to the family, but the question is relevant even where estate tax is not in the picture.

Charitable intent

A donor who wants to benefit a charity during life or at death can do so with a direct gift, or can use a structure that provides an income stream to the donor or the donor's family while directing the remainder to the charity. A charitable remainder trust pays income to the donor for a term of years or for life, then distributes the remaining assets to a named charity. The donor receives an immediate income tax deduction for the present value of the charity's remainder interest.

A charitable lead trust reverses the sequence. The charity receives income for a term of years, then the remaining assets pass to the donor's heirs. The structure can reduce gift or estate tax on the transfer to the heirs, but it also accomplishes a charitable goal and keeps assets in the family. Whether the income tax and transfer tax benefits justify the complexity depends on the size of the gift and the donor's tax position, but the charitable intent is often the primary driver of the decision.

These structures are still used, and they still produce the tax outcomes they were designed for. The difference is that fewer families now need them to avoid estate tax, so the question is whether the charitable and planning goals justify the cost and restrictions on their own.

Business succession

A family business presents its own set of problems. Who will own it after the current owner's death, who will manage it, and how will value be distributed among heirs who may have different levels of involvement in the business. A buy-sell agreement funded with life insurance can provide liquidity to buy out a deceased owner's interest. A voting trust or a family limited partnership can separate economic interest from control. Whether these structures reduce estate tax depends on the valuation and on how they are drafted, but the need to address succession and avoid disputes is often the primary concern.

The same is true for closely held real estate. A property owned by multiple heirs as tenants in common is a common source of family conflict. One heir wants to sell, another wants to hold, a third wants to use the property, and no mechanism exists to resolve the disagreement without a partition action. A trust or an LLC that holds the property and sets out the decision-making process in advance can prevent that outcome, whether or not there is any estate tax at stake.

Portability and the surviving spouse

The estate of a deceased spouse can elect to transfer any unused exemption to the surviving spouse. This is portability, and it is elected by filing Form 706 even if no estate tax is due. The surviving spouse then has their own exemption plus the unused portion of the deceased spouse's exemption, which can be used for lifetime gifts or at the surviving spouse's death.

Portability is generally understood to be available only if the election is made on a timely filed estate tax return, which for most estates means within nine months of death. If the first spouse's estate does not file the return and make the election, the unused exemption is lost. Whether that filing makes sense depends on the size of the surviving spouse's estate and the likelihood that they will need the additional exemption, but the decision has to be made at a time when the answer may not be clear.

A credit shelter trust, also called a bypass trust, is the older approach. At the first spouse's death, assets up to the exemption amount are placed in a trust for the benefit of the surviving spouse and other beneficiaries, but are not included in the surviving spouse's taxable estate. This preserves the first spouse's exemption without relying on portability. The trust also provides creditor protection and control over the ultimate disposition of the assets, which portability does not.

With a $30 million combined exemption, many married couples no longer need a credit shelter trust to avoid estate tax. Whether the trust is still useful depends on the non-tax goals it serves and on whether legislation might reduce the exemption before the second spouse's death.

Gifts made under the current exemption

The IRS issued final regulations in 2019 confirming that a gift made while the higher exemption is in effect will not be clawed back if the donor dies after the exemption has dropped. The gift uses the exemption available at the time of the gift, and the estate is not penalized for the difference. That guidance is set out in Treasury Decision 9884 and removes what had been the primary uncertainty about making large gifts while the exemption is high.

The downside is the same one that applies to any lifetime gift. The transferred assets lose the basis step-up. A gift of appreciated property avoids estate tax by removing the asset from the estate, but it also transfers the built-in gain to the recipient. Whether that tradeoff makes sense depends on the appreciation in the asset, the recipient's likely holding period and tax rate, and whether estate tax would actually be due without the gift. For a family with $20 million and concern about a future exemption reduction, the calculation may be straightforward. For a family with $12 million, it is less clear.

Real property across state lines

Real estate is subject to probate in the state where it is located. A Florida resident who owns a vacation home in North Carolina will have a Florida probate for the Florida assets and a North Carolina ancillary probate for the North Carolina property. The ancillary proceeding is a separate court process, governed by North Carolina law, with its own cost and delay.

A revocable trust that holds title to property in multiple states avoids the need for ancillary probate. The trust owns the property, the trustee has authority to distribute it under the trust terms, and no separate proceeding is required in the state where the property is located. For someone who owns real estate in more than one state, that is often sufficient reason to use a trust, regardless of the estate tax outcome.

What do the documents actually say?

Estate planning documents written when the exemption was lower often include formulas that divide the estate into a credit shelter trust and a marital trust based on the exemption in effect at death. With a $15 million exemption, that formula may place the entire estate in the credit shelter trust and leave nothing for the surviving spouse outright. Whether that is the intended result depends on the family's circumstances and on what the documents actually say.

The same problem arises with beneficiary designations on retirement accounts and life insurance. A designation that names a trust as beneficiary may have been written to take advantage of stretch distribution rules that no longer exist, or to fund a credit shelter trust that is no longer necessary. The designation controls what happens to the asset, and it is not automatically updated when the law changes. These designations and the governing documents describe the same plan and should be looked at together.

Bottom line

Federal estate tax matters for fewer estates than it did when the exemption was a fraction of its current level. The problems that remain are mostly not tax problems. They are basis, probate, control, succession, creditor protection, and coordination between documents written at different times under different law. The exemption level changes what makes sense to do, but it does not eliminate the need to have a plan.

An estate that will owe no federal tax may still benefit from a trust to avoid probate, hold assets for children, or address state estate tax. An estate that would owe tax without planning may find that the planning most relevant now is different from what it would have been when the exemption was lower. Where the concern is whether the exemption might be reduced by future legislation, the basis consequence of a lifetime gift may be larger than the estate tax benefit, and the decision depends on facts specific to the family and the assets.

This article describes how the rules are written, not what any particular family should do with them. The outcome depends on the size of the estate, the nature of the assets, the state of residence, the family structure, and what the existing documents say. Those are questions for an estate planning attorney with the documents in front of them. Written to the law as it stood in March 2025.