Estate Tax 2026: The TCJA Sunset, Portability, and Planning Strategies Before the Threshold Drops

What the TCJA sunset means: the $13.99M exemption drops to ~$7M

The Tax Cuts and Jobs Act of 2017 temporarily doubled the federal estate tax exemption, which had stood at $5.49M per individual in 2017 before TCJA. The doubled exemption — $11.18M in 2018, rising with inflation to $13.99M in 2025 per IRS Rev. Proc. 2024-40 — was always designed to be temporary. Section 2010(c)(3)(C) of the Internal Revenue Code provides that the increased basic exclusion amount “shall not apply” to estates of decedents dying or gifts made after December 31, 2025.

After the sunset, the exemption reverts to the pre-TCJA baseline of $5M per individual, indexed for inflation from 2011. Based on inflation from 2011 through 2026, the post-sunset exemption is estimated at approximately $7M per individual — roughly half of the 2025 level. IRS publication of the exact 2026 amount will follow in the annual Rev. Proc. (typically released in October or November of the preceding year).

The consequence is binary for families with estates between $7M and $14M per individual: zero federal estate tax under 2025 exemption rules, versus potentially significant estate tax under 2026 post-sunset rules. At the 40% top marginal rate under IRC §2001, a $10M estate of a single individual has zero federal estate tax in 2025 — and approximately $1.2M in federal estate tax in 2026 ($10M estate minus ~$7M exemption = $3M taxable, at 40% = $1.2M).

Portability and DSUE: how married couples double the exemption

The portability election under IRC §2010(c)(5) allows a surviving spouse to use the Deceased Spousal Unused Exemption (DSUE) of their predeceased spouse. For 2025, a married couple using portability has a combined exemption of up to $27.98M ($13.99M × 2) — the largest available in U.S. history. After the sunset, the combined portability exemption drops to approximately $14M.

Portability is not automatic. The executor of the first spouse's estate must file a timely Form 706 (United States Estate Tax Return) electing portability, even when no estate tax is owed at first death. The filing deadline is 9 months from the date of death with a 6-month extension available. Missing this deadline forfeits the DSUE entirely in most circumstances — turning what could be a $13.99M additional exemption into nothing.

Critical TCJA interaction: the DSUE amount is locked at the exemption level at the time of the first spouse's death. A spouse who dies in 2025 with $13.99M in exemption and only a $2M taxable estate has a DSUE of $11.99M. The surviving spouse can use that $11.99M DSUE even after the 2026 sunset reduces the surviving spouse's own exemption to ~$7M — potentially providing the surviving spouse with ~$18.99M in total exemption.

The anti-clawback rule: why pre-sunset gifts are permanently sheltered

Without regulatory protection, the TCJA sunset created a potential “clawback” problem: gifts made under the higher TCJA exemption could be added back to the estate at death (as “adjusted taxable gifts” under IRC §2001) and taxed under the lower post-sunset exemption.

The Treasury Department addressed this in IRS T.D. 9884, codified at Treasury Reg. §20.2010-1(c). The regulation explicitly prevents clawback: the credit available against the estate tax at death is the greater of (a) the credit based on the applicable exemption at death, or (b) the credit attributable to the exemption used on lifetime gifts. Per Jonathan Blattmachr, estate planning attorney (Trusts & Estates journal): “The anti-clawback regulation is what makes the pre-sunset gifting window genuinely valuable. Without it, the benefit of using the higher exemption could evaporate at death.”

In plain terms: a gift of $8M made in 2025 using the TCJA exemption is permanently sheltered from estate tax regardless of the exemption level at the donor's death. This makes the window through December 31, 2025 uniquely valuable for large gifts to irrevocable trusts.

Irrevocable trust strategies: SLATs, GRATs, and the pre-sunset window

The three primary irrevocable trust strategies families use to capture the TCJA exemption before the sunset:

1. Spousal Lifetime Access Trust (SLAT).One spouse (the grantor) makes an irrevocable gift to a trust for the benefit of the other spouse (the beneficiary), using the TCJA exemption to shelter the gift from estate tax. The beneficiary spouse retains access to trust distributions, preserving some family liquidity. Assets grow outside both spouses' taxable estates. Primary risk: the “reciprocal trust doctrine” — if both spouses set up identical SLATs for each other, the IRS may uncross the trusts and include assets back in each grantor's estate. SLATs must be meaningfully different in terms and timing. Consult a licensed estate planning attorney on SLAT structure.
2. Grantor Retained Annuity Trust (GRAT). The grantor transfers assets to an irrevocable trust, retains an annuity payment for a fixed term, and any appreciation in trust assets above the IRS hurdle rate (§7520 rate) passes to beneficiaries estate-tax-free. GRATs work best in low-interest-rate environments (when the §7520 rate is low, less appreciation needs to be generated to beat the hurdle) and with high-appreciation assets. If the grantor dies during the GRAT term, the assets return to the estate — GRATs work only if the grantor survives the term.
3. Irrevocable Life Insurance Trust (ILIT).An ILIT owns a life insurance policy on the grantor. Because the grantor does not own the policy, the death benefit is excluded from the grantor's gross estate under IRC §2042. The ILIT receives the death benefit and distributes it to beneficiaries according to trust terms — typically to pay any estate tax due and provide liquidity. Premiums are funded by gifts to the trust (using the annual exclusion or lifetime exemption). The ILIT does not expire with the TCJA sunset — it is permanently effective once established.

Per Jonathan Blattmachr, estate planning attorney (Trusts & Estates journal): “The families who will benefit most from the pre-sunset window are those with illiquid estates — business interests, real estate — where an estate tax bill after 2026 creates a forced liquidation problem. Irrevocable trusts can move those assets outside the estate now, while the TCJA exemption shelters the transfer.”

Annual exclusion gifting: the compounding estate tax reduction

The annual gift tax exclusion — $19,000 per donee in 2025 per IRS Rev. Proc. 2024-40 — allows gifts to any number of recipients without using the lifetime exemption or filing a gift tax return. Married couples can split gifts under IRC §2513, contributing $38,000 per donee per year. This exclusion resets each year — unused exclusion from prior years cannot be carried forward.

Annual exclusion gifting — 20-year compounding example
Married couple, 3 children, $38,000/child/year:

Annual gifts:          $114,000 (3 × $38,000)
20-year total removed: $2,280,000 from taxable estate
Estate tax avoided:    ~$912,000 (at 40% marginal rate on amt above exemption)

Plus appreciation on gifted assets (grows outside estate):
$114,000/yr × 6% growth over 20 years → $4.4M+ total in beneficiary accounts
Est. estate tax avoided on appreciation: ~$1.76M additional

(Illustrative only — assumes gifts exceed post-sunset exemption.
Verify current annual exclusion and your marginal rate with an attorney.)

Per Michael Kitces, financial planner (Kitces.com, 2024): “Annual exclusion gifting is often the most underutilized estate planning strategy — particularly for families who don't realize how much compounding value they're leaving in the taxable estate over 15–20 years.” The strategy requires no attorney each year once the program is established — just annual wire transfers to a custodial account or 529 plan for minor beneficiaries.

Who needs to act before December 31, 2025

Not everyone needs to act before the sunset. The planning urgency is calibrated to your estate size and family situation:

• Estates above $14M (married) or $7M (single) — immediate action warranted. You have existing estate tax exposure that irrevocable trust strategies and large pre-sunset gifts can permanently reduce.
• Estates $7M–$14M (married) or $3.5M–$7M (single) — action warranted if estate is growing. An estate at $8M today growing at 6%/yr reaches $14M in approximately 10 years — potentially crossing the post-sunset exemption threshold. Pre-sunset gifting now is more valuable than post-sunset planning later.
• Estates below $3.5M (single) or $7M (married) — limited direct estate tax urgency at the federal level. However, 17 states plus DC have separate estate or inheritance taxes with lower thresholds — if you live in Massachusetts, Oregon, or Washington (each with estate tax starting at $1M or $2M), state estate tax planning is relevant regardless of federal exemption level.
• Estates with illiquid assets (business interests, real estate) — the planning urgency is highest here, because an estate tax bill on an illiquid estate forces asset sales at potentially unfavorable prices. Irrevocable trusts that move illiquid assets outside the estate before the sunset are most valuable for this category.

Per Michael Kitces, financial planner (Kitces.com, 2024): “For families below the current exemption, the most important estate planning steps are still the basics: a funded revocable trust or current beneficiary designations, a durable power of attorney, and healthcare directives. The TCJA sunset is a real planning deadline, but not every family needs an irrevocable trust — the families who do need to act are generally the ones whose estate already exceeds or is approaching the post-sunset threshold.”

How I model the sunset gap — an operator’s worked example

When I model a client’s exposure I’ve found the cleanest way to see the stakes is to run the same estate through the 2025 and 2026 exemption side by side, because the dollar swing is rarely intuitive. Worked example: take a single individual with a $15M taxable estate. Under the 2025 ~$13.99M exemption, $1.01M is taxable at the 40% top rate (IRC §2001) — about $404K of federal estate tax. Run the identical $15M estate against the projected ~$7M 2026 exemption and $8M becomes taxable, producing roughly $3.2M of federal estate tax — an ~$2.8M increase driven entirely by the exemption drop, not by any change in the estate itself. That gap is what the pre-sunset gifting window and the anti-clawback rule exist to close.

Assumptions: the post-sunset exemption is modeled at ~$7M (the pre-TCJA $5M baseline indexed for inflation from 2011); the IRS publishes the exact 2026 figure in its annual revenue procedure. Calculations apply the 40% top federal rate under IRC §2001 and ignore state-level estate or inheritance taxes, which 17 states plus DC impose at lower thresholds. Figures are illustrative and are not legal or tax advice.

The exposure math, the 2025-vs-2026 toggle, and the assumptions above are operationalized in the estate-tax methodology and the open-source calculator source on GitHub (packages/calc).