July 17, 2026

Recent changes in federal estate tax laws have created a unique planning opportunity for families who want to preserve more of their wealth for the next generation. While tax laws are always subject to change, the July 2025 legislation provides a level of clarity and flexibility we have not seen in many years. Because your current estate plan already includes planning designed to reduce both capital gains and estate taxes, you may now be in a position to enhance those benefits even further. The following outlines how these changes affect you and the steps available to help minimize your family’s long-term tax savings. As Judge Learned had stated in a 1934 Appeals Court case, "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury... There is nothing sinister in so arranging affairs as to keep taxes as low as possible.”

In July of 2025, the estate tax laws were changed in a way that could provide you with an opportunity to save taxes for your family. This change made the amount a person can pass free from estate tax (referred to as the exemption) “permanent”, with annual increases for inflation. We are no longer concerned about an automatic reduction in the exemption simply because the calendar changed to a new year.

Beginning on January 1, 2026, a person can now pass $15,000,000 free of estate tax.

This is not to suggest that the exemption will always stay this high. Remember, when talking about the government, “permanent” means “until they change it later.” In this case, to lower the exemption, it will take the House, Senate, and President all agreeing to make this happen. We do not anticipate that will happen unless all three of them are controlled by the Democratic party. And, even if that happens, they may not reduce the exemption. As a frame of reference, the exemption in 2000 was only $675,000, in 2005, it was $1,500,000, and in 2009, it was $3,500,000.

Your estate planning documents focus on saving two types of tax at two different times. The first tax is savings from the capital gains tax at the first death. The second tax is savings from the estate tax on the second death. As a reminder, the capital gains tax is about 20% of an asset’s growth. The estate tax is 40% of the value of all the assets over the exemption.

First, because your Trust is a Tennessee Community Property Trust, at the first death, all untaxed capital gain in your assets will be eliminated. This means that if the survivor sold an asset, they would pay no capital gain tax on the asset’s growth in value from the time it was purchased to the date of the first death. This could save the survivor significant tax money. Normally, one-half of the capital gain goes away on assets you own together. But now, with the Community Property Trust, 100% of the untax gain goes away.

For example, if you purchased a property twenty years ago for $200,000 and it is now worth $1,000,000, then at the first death all untaxed $800,000 is eliminated instead of $400,000. Eliminating the extra $400,000 saves the survivor about $80,000 in capital gain tax.

Second, your Community Property Trust includes a Family Trust to hold assets after the first death. The Family Trust is designed to hold the assets in a way that no estate tax is charged against them at the second death, even if the estate value is greater than the exemption. For instance, if the Family Trust has assets worth $6,000,000 but the tax exemption is only $4,000,000, because the assets are held in the Family Trust, none of the $6,000,000 of assets would be taxed.

As you might imagine, the government is not excited about people taking steps to save taxes. One example is that, on the second death, you CANNOT protect your assets from BOTH the estate tax (40%) AND the capital gain tax that has accumulated after the first death. If you protect from the estate tax, later when your children sell the asset, they have to pay the 20% capital gain tax on an asset’s growth after the first death. Or, if you protect against the capital gain tax, if your total estate value exceeds the exemption, then your children will pay the 40% estate tax on the total value above the exemption.

Because of (i) the uncertainty in how large or small the exemption amount might be, and (ii) the higher estate tax rate compared to the capital gain tax rate – 40% vs. 20% - at the second death, your estate documents focused on eliminating the estate tax even though some capital gains might be paid later.

Now, with the change in the law from last July we can do both – eliminate capital gain and eliminate/reduce estate taxes. We do not have to choose one over the other. This change to the tax law allows your Trust document to:

• Eliminate all capital gain up to the first death.

• Eliminate all new capital gain on the growth from the first death to the second death.

• Eliminate/reduce estate taxes if you are under the combined exemption amount of both of you.

• This tax savings can be achieved by combining the below strategies, one of which you already have, another that the government has provided for several years but few take advantage of, and lastly, revising you Trust document for the final savings.

• Keep your Community Property Trust to eliminate all capital gain at the first death.

• Revise the Community Property Trust so that, at the second death, the capital gain growth in the Family Trust assets is also eliminated just as it was at the first death.

• So long as you are under the exemption amount, there will be no estate taxes due.

In amending and restating your existing Trust document, please note that you will not need to re-title any assets. They can remain titled in the Trust as they are. If you would like for our office to assist with amending your estate plan to take advantage of this new opportunity, the fee for the Amended and Restated new Community Property Trust is $2,500.

As we anticipate that many of our clients will want to take advantage of the new capital gain tax opportunity, please let us know if you’d like to discuss any questions that you may have with our team. We look forward to being able to assist you further in saving some more taxes!

DISCLAIMER: Please note that we cannot guarantee that the government will not change the tax laws again in the future. If they do, we will contact you about how that will affect your plan and if any additional changes are needed to provide you with the most tax saving options.