Adaptable estate planning in our one big beautiful world

The way we approach planning has shifted. Instead of counting down the days until the estate tax sunset, we are now in a more stable planning environment.

The One Big Beautiful Bill Act raised the federal estate tax exemption starting in 2026 to $15 million for an individual and $30 million for a couple. This could eliminate federal estate taxes for most clients.

Does this mean that clients whose net worth is below these thresholds don’t need to worry about estate planning?

No!

Estate planning still matters

Although the lifetime exemption under the OBBBA is described as “permanent,” in Washington that means until the next presidential election cycle! Help make this salient with a simple math exercise. Take your clients’ life expectancies and divide them by four to find their “political life expectancies”— the number of presidential elections likely to occur during their lifetimes. Your clients will see that they are likely to face many tax law changes, and they cannot be certain which laws will be in place when they die.

Beyond federal estate taxes, wealthy families may also face state estate and inheritance taxes, and income taxes on qualified retirement plan assets. This makes adaptable planning strategies even more important.

One of the most common ways to provide estate liquidity is survivorship, or second-to-die, life insurance owned outside of the estate, typically in an irrevocable life insurance trust. Because two lives are covered, the cost of insurance charges is lower compared to two individual policies. If structured properly, the death benefit is paid both income and estate tax free to the trust at the second death, exactly when the funds are needed.

Many younger clients who are good candidates to begin this type of planning are hesitant to set up plans that are “irrevocable,” because they fear losing control of assets. Spousal lifetime access trusts, which enable the non-grantor spouse to be a beneficiary of the trust can be a smart option, but survivorship life insurance in a SLAT comes with extra nuance and even with spousal access provisions, clients — especially those who aren’t convinced that they will eventually face an estate tax problem — still balk at giving up control for a lengthy period of time.

Adaptable alternative: Survivorship standby trusts

There is a strategy that can keep the death benefit out of the insureds’ estate while preserving access and adaptability. A survivorship standby trust works like this:

• The spouse with the shorter life expectancy personally owns a survivorship policy.
• The client names their revocable trust/credit shelter as the contingent owner and beneficiary of the policy.
• Assuming the owner-spouse dies first, the trust becomes the policy owner. (Note, the fair market value of the policy will be included in the owner’s estate.)
• The credit shelter trust can give the non-owner spouse access for health, education, maintenance and support.
• At the surviving spouse’s death, the death benefit is paid estate tax free to the credit shelter trust.

What are the advantages?

• Control: Because the policy is initially personally owned, the couple retains full access to potential policy cash value and can make policy changes as needed.
• No depletion of lifetime gifting exemption: The premium payments are not gifts since the insured is the owner. This can free up annual exclusions or lifetime exemptions for other purposes.
• Transfer option: The policy can always be transferred to a trust later if it makes sense, subject to the three-year rule and gift tax valuation rules at the time of transfer.
• Less estate tax exposure

What are the potential drawbacks?

• Estate inclusion: If the owner-spouse dies first, the fair market value of the policy is included in their estate.
• Risk of dying “out of order:” If the non-owner spouse dies first, and ownership is not proactively changed, the death benefit will be fully included in the owner/spouse’s estate. The owner/spouse could give the policy to an ILIT, but it will be subject to the three-year rule. The three-year rule can be avoided by having the trust purchase the policy from the insured for fair market value. Clients should consult their legal and tax advisors for specific information.

The survivorship standby trust can be an attractive option for married clients who need to start their estate and wealth transfer journey but want to preserve adaptability to react to future tax law changes.

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