Under the TCJA (Tax Cuts and Jobs Act), the 2025 exemption amount is $13.99 million resulting in less than tw0-tenths of 1 percent (0.2%) of estates becoming subject to federal estate taxes. The bump in the exemption to $15 million under OBBBA in 2026 can only further reduce the number of estates subject to federal estate tax.

Had Congress not acted, the exemption under TCJA would have sunset to prior law at an amount of about $7 million (indexed to inflation). Until the enactment of the OBBBA, estate planners were, justifiably, quite wary of the sunset provision. Should they advise their clients to adjust their estate planning based on the TCJA exemption or the smaller prior law exemption which was scheduled to return after 2025? With the sunset provision staring planners in the face, many chose the conservative route and planned around an ultimately smaller estate tax exemption.

It is significant that the new exemption is “permanent.” It does not sunset and the exemption continues until Congress affirmatively acts to change it. Planners may now be more comfortable using a larger estate tax exemption in their assumptions. Although “permanence” has a different meaning when it comes to tax law than it does in everyday language, planners are no longer looking at a default position of a lower estate tax exemption. In fact, should Congress act sometime in the future, there is no telling where the estate tax exemption may land.

While a reduction in estate taxes is a beautiful thing, it causes One Big Beautiful Estate Tax Dilemma!  Just what do you plan for? Although conservative advisors may project something less than the OBBBA’s estate tax exemption in the future, there’s no reason to assume that it will drop all the way back to the level prior to the TCJA. In the final analysis, however, it may well come to pass that some life insurance, purchased for estate tax purposes, may be felt to be no longer necessary.

A decision may be required on how to deal with life insurance policies made redundant by the OBBBA and how to maximize the value of such policies. A popular choice is likely to be to keep the policy in force. A life insurance policy, even without estate taxes, is one of the most efficient ways to pass wealth to beneficiaries and, in addition, can still serve as a hedge against an increased estate tax liability should that happen.

In some instances, however, maintaining a policy can be putting a financial strain on the premium payer and dropping it would provide relief. Or in an environment with reduced estate taxes, it’s possible those premium dollars could be put to better use. When a decision is made that an in-force life insurance policy will be dropped, a life settlement could maximize the value of that policy.

When a client’s revised estate plan includes cancelling a life insurance policy, be sure to investigate the life settlement opportunity. It can’t hurt to try – it can only hurt not to!