The One Big Beautiful Bill Act (“OBBBA”) became law on July 4, 2025. This legislation permanently preserves and increases the federal estate, gift and generation-skipping transfer tax exclusion amounts that were set under the 2017 Tax Cuts and Jobs Act (“TCJA”).
The TCJA temporarily doubled the basic exclusion amount from $5 million to $10 million (indexed for inflation), but the increase was scheduled to sunset at the end of 2025, resulting in a reinstatement of the $5 million threshold (indexed for inflation).
Effective January 1, 2026, the OBBBA raises the federal estate, gift and generation-skipping transfer tax exemption thresholds to $15 million (currently $13.99 million), with the annual amount indexed for inflation thereafter.
The OBBBA offers predictability and certainty to estate planning and will especially benefit high-net-worth taxpayers. New York taxpayers should be mindful that the New York estate tax exclusion amount remains at $7.16 million (for 2025), and thus, New York estates over $7.16 million will remain subject to New York’s estate tax.
On July 19, 2024, the IRS released final regulations on year of death required minimum distributions (“RMD”). Previously, for an IRA owner who had reached the required beginning date and died before satisfying his or her annual RMD, the IRA beneficiary was responsible for taking the remaining RMD amount by December 31 in the year of the owner’s death. Failure to meet this deadline could result in an excise tax of up to 25%.
The new regulations, which apply to RMDs beginning on or after January 1, 2025, provide that if a beneficiary fails to satisfy the RMD in the year of the IRA owner’s death, there is an automatic waiver of the excise tax.
The deadline to take the missed RMD and be eligible for the automatic waiver is now the later of (1) the tax filing deadline for the taxable year of the beneficiary that begins with or within the calendar year in which the IRA owner died, and (2) the end of the following calendar year. For most traditional IRA beneficiaries, this means the year of death RMD deadline is now December 31 of the year after the IRA owner’s year of death.
If you have executed estate planning documents such as a Last Will and Testament or a Revocable Trust, you may think your estate plan is complete. However, reviewing and updating beneficiary designations to coordinate with your estate plan is an important step in the estate planning process. Inaccurate beneficiary designations can frustrate your carefully considered estate plan and cause your assets to pass in unintended ways.
Beneficiary designations are form documents completed by an account owner (“Owner”) that provide how the Owner would like the assets to pass upon the Owner’s death. Valid beneficiary designations supersede any provision of the Owner’s Will that purports to dispose of the beneficiary-designated asset. Beneficiary-designated assets, also called “non-probate” assets, pass outside of the Owner’s probate estate. There are advantages to using beneficiary designations to create a class of non-probate assets in an Owner’s estate, including probate avoidance, avoiding attachment by creditors, and the ease of collecting assets by a beneficiary.
Nonetheless, it may still be advantageous or necessary to name a trustee of a trust under a Will (known as a “testamentary trust”) as a beneficiary of an account to coordinate with the overall estate plan or even name the Owner’s estate to provide liquidity for business continuation purposes or for payment of taxes and expenses.
Bank deposit accounts (checking accounts, savings accounts and certificates of deposit) can be transferred to a named beneficiary upon the Owner’s death by a Payable on Death designation. Investment accounts (brokerage accounts, stocks and bonds) can be transferred by a Transfer on Death designation. Investment accounts can also be held as “In Trust For” accounts, to be held for the benefit of the nominated beneficiary until the account Owner’s death.
An Owner of a life insurance policy or retirement account (IRA, 401(k), 403(b), etc.) may name beneficiaries to receive the death benefit proceeds. While these assets are frequently directed to individuals as beneficiaries, they may also be directed to lifetime trusts or testamentary trusts, charities or, sometimes, to the Owner’s estate. A beneficiary, other than an estate or trustee of a testamentary trust, does not need a court proceeding to collect the policy or account benefits.
While it may appear simple, there are several common mistakes Owners make when completing beneficiary designations. First, Owners commonly fail to update beneficiary designations after the occurrence of significant life events (e.g., marriages, births, deaths or divorces).
Second, a common estate plan for a married Owner is to leave all assets to the spouse outright or, if the spouse does not survive, to fund testamentary trusts for the Owner’s minor children. Frequently, the beneficiary designation instead lists the spouse as primary beneficiary with minor children as contingent beneficiaries, making the minor children the direct beneficiaries of the asset rather than the testamentary trust established for the minor’s benefit. This error may subject the Owner’s beneficiaries to a costly guardianship proceeding, resulting in greater court oversight and negating the testamentary trust.
Third, beneficiary designations for retirement accounts must be seriously considered, especially in the context of the SECURE Act. Under current law, most non-spouse beneficiaries are required to receive the entire account balance within 10 years of the Owner’s death. Using a beneficiary designation to direct an account to a testamentary trust does not extend the period of time in which the account must be paid out. It does allow the trustee to control and protect the amounts received for the individual in trust and make informed decisions to potentially reduce income tax.
Finally, if an Owner seeks estate tax minimization or deferral provisions through the use of testamentary trusts, improperly designating individuals as beneficiaries may result in significant estate tax ramifications. If an Owner intends to use testamentary trusts to utilize the New York and federal estate tax exemption amounts, but fails to direct assets to such trusts, there may be insufficient assets in the probate estate to fully utilize the exemptions. Further, depending on the beneficiary, amounts distributed in excess of the exemptions may result in increased estate tax owed on the spouse’s death or immediately upon the Owner’s death.
Having accurate and estate-plan-consistent beneficiary designations can save time, money and effort. The list above is not exhaustive, and changes to beneficiary designations should be considered with the assistance of a professional in the context of your total estate plan.
Additional Assistance
If your current estate plan is affected by any of the foregoing, or if you would like us to review and assist you in updating your plan, please contact a member of our Trusts and Estates Practice Group or the Phillips Lytle attorney with whom you have a relationship.
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