Estate Tax Exemption 2026: What the Sunset Means for Your Wealth
On January 1, 2026, the federal estate tax exemption is scheduled to drop by roughly half. For a married couple, that's a potential swing from $27.22 million in protected wealth to approximately $14 million — a $13 million difference that could cost heirs over $5 million in federal estate taxes alone.
This isn't speculation. It's current law. The Tax Cuts and Jobs Act of 2017 temporarily doubled the estate tax exemption, but that provision expires at the end of 2025. Unless Congress acts, the exemption reverts to its pre-2018 level, adjusted for inflation.
For families with estates above the new threshold, the planning window is closing. Here's what you need to understand and the strategies that can protect generational wealth.
Understanding the 2026 Estate Tax Sunset
The estate tax exemption determines how much you can pass to heirs free of federal estate tax. Amounts above the exemption are taxed at 40%.
The numbers:
| Year | Individual Exemption | Married Couple (Portability) |
|---|---|---|
| 2024 | $13.61 million | $27.22 million |
| 2025 | ~$14 million (projected) | ~$28 million |
| 2026 | ~$6-7 million (projected) | ~$12-14 million |
The exact 2026 number depends on inflation adjustments to the base $5 million exemption established in 2010. Current projections suggest approximately $6.5-7 million per person.
Who's affected:
If your estate (including life insurance death benefits, retirement accounts, real estate, and business interests) exceeds the post-sunset exemption, you face potential estate tax liability. This includes many families who don't consider themselves "wealthy" but have accumulated assets through home appreciation, business ownership, or life insurance policies.
According to the Tax Foundation, the number of estates subject to federal estate tax could increase from approximately 2,000 per year to over 10,000 per year after the sunset.
The "Use It or Lose It" Opportunity
The IRS has provided crucial guidance: gifts made under the higher exemption won't be "clawed back" after the exemption drops. This means you can use your full $13.61 million exemption now, and even if the exemption drops to $7 million in 2026, those gifts remain protected.
Example:
Sarah has a $20 million estate. In 2025, she gifts $13 million to an irrevocable trust for her children, using her full exemption. In 2026, the exemption drops to $7 million. When Sarah dies in 2030, her remaining $7 million estate passes tax-free (within the new exemption). The $13 million she gifted in 2025 is not pulled back into her estate — it's already been transferred.
Without the 2025 gift, Sarah's $20 million estate would face estate tax on $13 million ($20M - $7M exemption), resulting in approximately $5.2 million in federal estate tax.
The planning imperative:
Families with estates between $7 million and $28 million (for married couples) have the most urgent planning need. Below $7 million, the sunset doesn't create new liability. Above $28 million, estate tax planning was already necessary. The middle range represents families who may not have done sophisticated planning but now face significant exposure.
Key Strategies Before the Sunset
1. Spousal Lifetime Access Trusts (SLATs)
A SLAT allows one spouse to gift assets to an irrevocable trust for the benefit of the other spouse and descendants. The gifting spouse uses their exemption, removes assets from their estate, but the family retains access through the beneficiary spouse.
How it works:
- Husband creates a SLAT naming Wife as beneficiary
- Husband transfers $13 million to the trust, using his exemption
- Wife can receive distributions from the trust as needed
- Assets grow outside Husband's estate
- At Husband's death, trust assets pass to children estate-tax-free
Considerations:
- Reciprocal trust doctrine: If both spouses create identical SLATs for each other, the IRS may collapse them. Structure SLATs with meaningful differences.
- Divorce risk: If the marriage ends, the beneficiary spouse retains access to the trust.
- State law variations: Some states have different rules for trust taxation.
2. Intentionally Defective Grantor Trusts (IDGTs)
An IDGT is structured so the grantor pays income taxes on trust earnings, but the trust assets are excluded from the grantor's estate. This allows wealth to grow tax-free inside the trust while the grantor's payment of taxes is an additional tax-free gift.
The IDIT variation:
An Intentionally Defective Irrevocable Trust (IDIT) combines IDGT benefits with specific planning for wealth transfer. The grantor sells assets to the trust in exchange for a promissory note, freezing the value for estate tax purposes while allowing future appreciation to pass to beneficiaries.
Example:
John sells $10 million in stock to an IDIT in exchange for a 9-year note at the applicable federal rate (currently around 5%). The trust pays John approximately $1.4 million annually. If the stock appreciates to $15 million over 9 years, the $5 million in appreciation passes to John's children estate-tax-free.
3. Grantor Retained Annuity Trusts (GRATs)
A GRAT allows you to transfer appreciating assets while retaining an annuity payment. If the assets outperform the IRS assumed rate of return (the Section 7520 rate), the excess passes to beneficiaries gift-tax-free.
Zeroed-out GRATs:
By structuring the annuity to equal the initial gift value plus assumed interest, you can create a GRAT with zero gift tax cost. All appreciation above the 7520 rate passes to beneficiaries free of gift and estate tax.
Current opportunity:
With Section 7520 rates around 5% in 2026, assets that appreciate faster than 5% annually generate tax-free transfers. A $5 million GRAT holding growth stocks that return 10% annually could transfer over $1 million to heirs tax-free over a 2-year term.
4. Direct Gifts and Annual Exclusions
Sometimes simple is best. Direct gifts using the annual exclusion ($18,000 per recipient in 2024) require no exemption and no gift tax return.
Maximizing annual exclusions:
- A married couple can give $36,000 per recipient annually
- Gifts can go to children, grandchildren, and their spouses
- A couple with 3 children and 6 grandchildren can transfer $324,000 annually
- Over 10 years, that's $3.24 million transferred with zero gift tax implications
529 plan superfunding:
You can front-load 5 years of annual exclusions into a 529 education savings plan — $90,000 per beneficiary for individuals, $180,000 for married couples. This removes assets from your estate while funding education for the next generation.
Life Insurance Planning Considerations
Life insurance death benefits are included in your estate if you own the policy. For large policies, this can push estates over the exemption threshold.
Irrevocable Life Insurance Trusts (ILITs):
An ILIT owns the life insurance policy, keeping death benefits out of your estate. The trust can provide liquidity to pay estate taxes on other assets or simply pass wealth to beneficiaries.
Existing policies:
If you currently own a life insurance policy, you can transfer it to an ILIT. However, there's a 3-year lookback rule — if you die within 3 years of the transfer, the policy is pulled back into your estate. Plan early.
Second-to-die policies:
For married couples using portability, estate tax is typically due at the second death. Second-to-die life insurance policies (which pay out when the surviving spouse dies) can provide liquidity exactly when estate taxes are due.
State Estate Tax Considerations
Federal estate tax is only part of the picture. Many states impose their own estate or inheritance taxes with lower exemptions:
| State | Estate Tax Exemption (2024) |
|---|---|
| Massachusetts | $2 million |
| Oregon | $1 million |
| New York | $6.94 million |
| Washington | $2.193 million |
| Illinois | $4 million |
Residents of these states face estate tax exposure at much lower wealth levels. State-level planning may be necessary even for estates below the federal exemption.
Domicile planning:
Some families consider relocating to states without estate taxes (Florida, Texas, Nevada, etc.) as part of their estate planning strategy. This requires genuine change of domicile, not just purchasing property.
Key Takeaways
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The estate tax exemption drops approximately 50% on January 1, 2026 unless Congress acts. Plan as if the sunset will occur.
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Gifts made under the higher exemption are protected from clawback. "Use it or lose it" is real.
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SLATs, IDGTs, and GRATs offer sophisticated strategies to transfer wealth while retaining some access or benefit.
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Annual exclusion gifts remain powerful for systematic wealth transfer without using exemption.
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Life insurance planning through ILITs can keep death benefits out of your estate and provide liquidity for taxes.
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State estate taxes may apply at lower thresholds than federal. Consider your state's rules.
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Act before December 31, 2025 to maximize planning opportunities under the current exemption.
Frequently Asked Questions
When does the estate tax exemption change?
The current elevated exemption ($13.61 million per person in 2024) sunsets on December 31, 2025. Starting January 1, 2026, it reverts to approximately $6-7 million per person, adjusted for inflation. This is current law, not a proposal.
Will Congress extend the higher exemption?
Uncertain. While extensions are possible, prudent planning assumes the sunset will occur as scheduled. Waiting to see what happens risks missing the window to use the higher exemption. Even if an extension passes, having a plan in place provides flexibility.
Can I still benefit from the higher exemption after 2025?
Yes, if you make gifts before the sunset. The IRS has confirmed that gifts made under the higher exemption won't be clawed back even after the exemption drops. This "anti-clawback" rule is established in Treasury regulations.
What's the estate tax rate after the exemption?
The federal estate tax rate is 40% on amounts exceeding the exemption. Some states add their own estate or inheritance taxes, potentially pushing combined rates above 50% in high-tax states like Massachusetts or Washington.
Do I need to act immediately?
You have until December 31, 2025, but complex planning takes time. Trusts need to be drafted, assets need to be valued and transferred, and gift tax returns need to be filed. Starting the process in early 2025 or sooner provides adequate time for thoughtful planning.