Tax Sunset Looming: Is Your Estate Ready for 2026?

Fifteen months remain until certain provisions of the Tax Cuts and Jobs Act expire on January 1, 2026. No sunsetting provision will be more dramatic than when the estate tax exemption reverts to 2017 levels, effectively halving the current exemption amount.

Consider a married couple with a $27 million combined estate: if both die before December 31, 2025, their estate tax would be $0. However, if they die on January 1, 2026, or later, the potential estate tax could exceed $5 million. A single taxpayer with a $10 million estate would face zero tax today; on January 1, 2026, their heirs could be hit with an estate tax bill of over $1 million. This situation certainly grabs your attention, doesn’t it?

Note: For ease of understanding, numbers throughout this article are approximations.

What is the Estate Tax Exemption?

The estate tax exemption is the total amount a person can transfer to a non-spouse or non-charity beneficiary without triggering a transfer tax—gift, inheritance, estate, or death tax. This exemption increases with inflation each year. Gifts or bequeathals to one’s spouse or to a qualified nonprofit are not subject to transfer taxes.

Understanding the “Disappearing Exemption”

To grasp the implications of the changes coming at the end of 2025, consider each taxpayer’s estate tax exemption. Until December 31, 2025, the exemption for an individual is $13.61 million. Think of this as comprising two parts: a “Base Exemption” of $7 million, which will remain after sunset, and a “Bonus Exemption” of $6.61 million, which will disappear.

The difficulty in taking full advantage of the estate tax exemption amount is that you must irrevocably use the base exemption before the bonus exemption comes into play. We discussed this challenge previously, and our advice remains: “Go Big or Don’t Bother.”

You may digest this situation and decide, “Yes, this applies to me and I ought to act, but I probably wouldn’t choose to make an irrevocable gift now except for the risk of losing the bonus exemption.” For you, the “Reluctant Grantor¹,” we encourage you to pursue one of the two following paths expeditiously.

Option One: Prepare the Plan, But Don’t Execute Yet

Work with your estate lawyer to craft a plan that is ready to execute. This typically involves several meetings, drafting at least one irrevocable trust, and re-titling assets that might fund the trust. This is like preparing a meal and freezing it—ready to go if the political landscape in late 2025 doesn’t favor extending the higher exemption. “Relief” might come as an extension of the current exemption amount or another measure.

Option Two: The Two-Step Gift/Sale Plan

If you’re not ready to make an irrevocable gift of $13.61 million, especially with the uncertainty of a law extension, consider a different approach. You might not want to remove that much from your estate or may need access to those funds. However, you still understand the importance of freezing your estate’s growth.

In this case, you could set up the trust now, partially fund it with a gift² of $1.36 million, and then sell $12.25 million in assets to the trust in exchange for a promissory note³. This note remains your asset—you haven’t given these assets away yet. If, by December 2025, no legislative relief appears, you might forgive part or all of the note, effectively making a gift of its value. This would utilize the rest of your base exemption and some of your bonus exemption. Alternatively, if relief is granted, you can opt not to forgive the note and continue to receive interest and principal from the trust as payment.

Both scenarios likely incorporate the use of a Grantor Trust that can include provisions making the sale transaction described free of income tax. Read more here.

Additional Considerations

There are multiple variations on the above two scenarios as well as three other options:

• Hope: Hope to live long enough to spend it all or witness a more favorable transfer tax system.
• Charity: Give away enough during your lifetime or at death so that the government’s share is minimal or tolerable.
• Apathy: Decide it’s too much trouble and expense to worry about estate planning—leave the tax burden to your heirs. After all, paying estate tax was once almost a certainty for most clients. Today, only estates over $27.22 million (for married taxpayers) or $13.61 million (for single taxpayers) face the tax, but after January 1, 2026, without new legislation, those couples worth over $13.61 million could owe taxes upon death or transfer.

In any case, we stand ready to help you think through your choices. We encourage you to act sooner rather than later, as waiting until the fourth quarter of next year is a recipe for chaos. As with all good planning, there is no “one-size-fits-all” option, and there are many traps for the unwary. We encourage the involvement of your legal and tax professionals. Together, your advisors do better work than when operating in silos.

Key Terms and Footnotes

¹ A “Grantor” in this scenario is someone who creates a trust and transfers assets to it by gift or sale. More on Grantor Trusts can be found here. Back to article

² The gift of $1.36 million uses a portion of your “base exemption.” While the gift must be reported on a gift tax return, no transfer tax is due. Back to article

³ When a grantor sells assets to a grantor trust, it is not a taxable event, meaning no capital gains are reported. The assets sold to the trust should reliably generate cash flow to repay the promissory note. More details here. Back to article

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.