The Estate Exemption Sunset Is Coming: What to Do Before 2026 Runs Out

How Much Will the Estate Tax Exemption Drop in 2026?

The Tax Cuts and Jobs Act of 2017 doubled the federal estate tax exemption, pushing it from roughly $5.5 million per person to over $11 million. Adjusted for inflation, the 2025 exemption sits at $13.99 million per individual, or $27.98 million for a married couple. That is the amount you can transfer to heirs free of the 40% federal estate tax.

This higher exemption was always temporary. The TCJA included a sunset provision: on January 1, 2026, the exemption reverts to its pre-2018 baseline, adjusted for inflation. The projected 2026 exemption is approximately $7 million per person, or $14 million per couple.

That is a $7 million per person drop. For a married couple, the reduction in sheltered transfer capacity is nearly $14 million. At a 40% estate tax rate, a family that does nothing could face an additional $5.6 million in estate taxes.

Who Is Affected by the Estate Tax Exemption Sunset?

Families with estates between $7 million and $14 million per person are most affected by the sunset. If your total estate is below $7 million per person, the sunset does not create a new tax exposure for you.

The families in the crosshairs are those with estates between $7 million and $14 million per person. Under today's rules, their entire estate passes tax-free. After the sunset, the amount above $7 million is taxed at 40%. That is a significant shift for business owners, real estate investors, tech executives with concentrated equity, and dual-income professionals who have accumulated more than they realize.

I also see this affect families who are not yet at $14 million but are growing rapidly. If your estate is $10 million today and growing at 7% annually, you could be at $14 million within five years. Planning now, while the exemption is still high, protects not just today's wealth but future growth.

You can run your estate through the complexity assessment to see where you stand and whether the sunset creates exposure for your family.

How Can I Lock In the Higher Estate Tax Exemption?

The IRS has confirmed through Treasury Regulation 20.2010-1(c) that gifts made under the current higher exemption will not be "clawed back" if the exemption later drops. This is the key: if you use the exemption before it sunsets, you keep the benefit permanently.

Spousal Lifetime Access Trust (SLAT)

A SLAT is the most common tool I use with married couples. One spouse creates an irrevocable trust for the benefit of the other spouse (and often children). The grantor spouse makes a gift to the trust, using their estate tax exemption. The assets leave the grantor's taxable estate, but the beneficiary spouse can still receive distributions from the trust.

This solves the biggest objection I hear: "I do not want to give away money I might need." With a SLAT, the beneficiary spouse retains access. It is not full control, but it is meaningful liquidity. I walk through the full SLAT strategy in a separate article for couples considering this approach.

Irrevocable Life Insurance Trust (ILIT)

Life insurance death benefits are included in your taxable estate if you own the policy. An ILIT holds the policy outside your estate. The trust is the owner and beneficiary. When you die, the death benefit goes to the trust, not your estate, and is not subject to estate tax. For someone with a $3 million life insurance policy, an ILIT can save $1.2 million in estate taxes at the 40% rate.

Direct Gifting to Irrevocable Trusts

If you are comfortable parting with assets permanently, you can make outright gifts or transfers to irrevocable trusts for your children or grandchildren. The gift uses your exemption, removes the assets (and all future growth) from your estate, and locks in the higher exemption before it drops.

I typically structure these as dynasty trusts in states with favorable trust laws. The trust can last for multiple generations, compounding tax-free growth outside the estate.

Grantor Retained Annuity Trust (GRAT)

A GRAT works well for assets you expect to appreciate significantly, like concentrated stock positions or pre-IPO shares. You transfer assets into the trust and receive an annuity stream back over a set period. If the assets grow faster than the IRS hurdle rate (the Section 7520 rate), the excess passes to your heirs tax-free. The exemption usage is minimal because of the annuity offset.

What Happens If You Miss the Estate Exemption Deadline?

If the sunset proceeds as scheduled and you have not used the higher exemption, the excess exemption simply disappears. You cannot retroactively gift in 2027 using 2025 exemption amounts. The opportunity is time-limited.

For a married couple with a $20 million estate, the math is direct. Under current rules, the entire estate passes tax-free. After the sunset, $6 million is exposed to the 40% tax, creating a $2.4 million liability. That is $2.4 million your heirs lose because of inaction, not because of a change in your financial situation.

I work with families on this regularly, and the ones who wait until Q4 often face rushed decisions. Estate planning attorneys and trust companies are already seeing increased demand. The legal work for a properly drafted SLAT or irrevocable trust takes 4 to 8 weeks, and asset retitling adds more time.

Will Congress Extend the Estate Tax Exemption?

This is the question I get most often. Some version of an extension bill has been discussed in Congress, but as of June 2026, the sunset took effect on January 1, 2026. No legislation was passed in time to prevent the reduction.

Even if future legislation reinstates the higher exemption, the planning done under the previous rules is not wasted. Assets transferred into irrevocable trusts remain outside your estate. The growth on those assets continues to compound tax-free. And the IRS anti-clawback regulation protects gifts made under the higher exemption, regardless of what happens to the exemption later.

In other words, acting was the right call whether Congress extended or not. The only scenario where you would regret these transfers is if you needed the assets back for personal spending, which is why I focus heavily on liquidity planning before recommending any irrevocable transfer.

What Steps Should I Take Before the Exemption Drops?

If you think the sunset affects you, here is the sequence I walk clients through:

• Calculate your total estate value. Include everything: real estate, brokerage accounts, retirement accounts, life insurance face value, business interests, and any prior taxable gifts.
• Model the tax exposure. Compare your estate under the current exemption versus the projected post-sunset exemption. The gap is your planning opportunity.
• Choose the right vehicle. A SLAT, ILIT, GRAT, or direct gift each serves a different purpose. The choice depends on your liquidity needs, family dynamics, and asset types.
• Engage your estate attorney. Trust drafting, funding, and retitling take time. Start the legal work early.
• Coordinate with your tax advisor. Gift tax returns (Form 709) must be filed, and the income tax treatment of grantor trusts requires ongoing planning.

I coordinate with your estate attorney and CPA to make sure the investment strategy, tax elections, and trust terms all align. This is not a decision you make in isolation. Learn more about how I approach trust and estate planning with families navigating these decisions.