Federal Estate Tax Sunset Dec 31, 2025: What Wealthy Families Should Do Now

On January 1, 2026, the federal estate and gift tax exemption is scheduled to revert from $13.99 million per person ($27.98M per couple) to approximately $7 million per person — a roughly 50% reduction in the lifetime exemption that has shaped wealth-transfer planning since 2018. For families with net worth above the post-sunset threshold, the calendar matters: gifts completed before December 31, 2025 use the higher exemption, and the IRS has confirmed (in Treasury Decision 9884) that those gifts will not be clawed back later.

What is changing

The Tax Cuts and Jobs Act of 2017 doubled the federal estate-tax exemption. In 2025 the exemption stands at $13.99M per individual, indexed for inflation. The TCJA included a built-in sunset: at midnight on December 31, 2025, the exemption reverts to its pre-TCJA level adjusted for inflation, which most projections place near $7M. The federal estate-tax rate above the exemption remains 40%.

For a married couple with a $20M net worth, this matters concretely. In 2025 the combined $27.98M exemption fully shelters the estate from federal estate tax. In 2026, the combined $14M exemption leaves $6M exposed at 40%, or $2.4M of federal estate tax. Plus state estate tax, where applicable.

Pre-sunset gifting strategies

The defining planning opportunity is to use the elevated exemption before it sunsets. Three structures dominate practitioner conversations:

Outright lifetime gifts

The simplest approach: gift assets directly to children, grandchildren, or other beneficiaries. A married couple can transfer up to $27.98M without federal gift tax in 2025 by using both spouses' lifetime exemptions. Trade-off: gifts during life use carryover basis (the recipient inherits your basis). For low-basis appreciated assets, the loss of step-up at death may exceed the estate-tax savings. Cash and high-basis assets are the better candidates for outright gifts.

Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust where one spouse gifts assets to a trust for the benefit of the other spouse and (typically) descendants. The gifted assets — and all future appreciation — are removed from the gifting spouse's estate. The beneficiary spouse retains indirect access through trust distributions, which addresses the most common emotional objection to large gifts (loss of control). Reciprocal SLATs (each spouse gifting to a trust for the other) require careful drafting to avoid the reciprocal-trust doctrine.

Grantor Retained Annuity Trust (GRAT)

A GRAT is an irrevocable trust where you transfer assets and retain an annuity payment for a fixed term. If the assets appreciate faster than the IRS §7520 hurdle rate, the excess passes to the beneficiaries gift-tax-free at the end of the term. GRATs work best with volatile or rapidly-appreciating assets — pre-IPO equity, founder stock, or concentrated positions in growth equities.

What about state estate taxes?

Twelve states plus DC impose their own estate taxes, often at exemption levels far below federal. Massachusetts kicks in at $2M, Oregon at $1M, Illinois at $4M, Minnesota at $3M, DC at $4M. New York uses a cliff structure: estates over $7.16M (2025) lose the exemption entirely. State estate-tax planning is independent of federal sunset planning and applies to far more families.

Decision framework

Three filters for whether sunset planning matters for your family:

Net worth above post-sunset exemption. If your estate is below ~$7M (single) or ~$14M (couple), federal sunset doesn't affect you. State estate-tax planning may still apply.

Significant appreciation expected. The earlier you transfer appreciating assets out of your estate, the more future growth is excluded. A 50-year-old with $10M of pre-IPO equity has a different calculus than an 80-year-old holding the same amount in stable bonds.

Liquidity and lifestyle considerations. Outright gifts and SLATs are irrevocable. Make sure you retain enough wealth for your own lifetime needs before locking up large amounts. SLATs preserve indirect access through the spouse beneficiary; outright gifts do not.

Action items if you're affected

Engage an estate-planning attorney now if you haven't already. SLATs and GRATs require 60-90 days minimum to document and fund correctly; rushed structures invite IRS challenge. Your CPA, attorney, and financial advisor should coordinate on the gift-tax return (Form 709) and any §6166 elections relevant to closely-held business interests.

Even if Congress extends the higher exemption (which has happened twice in this exemption's history), pre-sunset planning is rarely wasted: gifts made under the current law use the current law's exemption, regardless of future legislation.