The Estate-Tax Exemption Sunset: Why 2026 Matters for Gifting Timing
The 2017 TCJA exemption increase sunsets on December 31, 2025, cutting the lifetime gift and estate exemption from 13.99M to roughly 7M per person. Anti-clawback regs protect pre-sunset gifts.
A tech founder with $35 million of pre-IPO stock has heard about the “sunset” for two years. Her estate planner has been pushing for SLAT and IDGT funding before year-end 2025. She keeps delaying because the IPO might happen in Q1 and she wants to avoid the appearance of pre-arranged gifts.
The sunset is real. On December 31, 2025, absent Congressional action, the federal lifetime gift and estate tax exemption drops from $13.99 million per person to approximately $7 million (adjusted for inflation). A married couple’s combined exemption drops from $27.98 million to roughly $14 million.
For families with estates at or above the current exemption, this is a potentially multi-million-dollar planning question. The IRS’s anti-clawback regulations protect gifts made while the exemption is high; gifts after the sunset are subject to the lower exemption.
Time is the variable. By April 2026, the actions take place in a specific year, and Congress’s actions in mid-2025 (or not) will determine what gets preserved.
The 2017 TCJA change
The 2017 Tax Cuts and Jobs Act increased the federal estate and gift tax exemption from approximately $5.5M per person (2017) to $10M per person (2018), adjusted for inflation. The 2025 exemption is $13.99M per person.
Section 2010(c)(3)(C) of the Code, as amended by TCJA, sunsets this increase on December 31, 2025. Without further legislation, the exemption reverts to pre-TCJA levels (approximately $5M per person, adjusted for inflation to about $7M in 2026).
What actually happens at the sunset
On January 1, 2026, if no new legislation is passed:
- The lifetime gift and estate tax exemption drops from $13.99M (2025) to approximately $7M (2026 estimate).
- A person who gave $7M before 2026 and dies in 2026 has used all 2026 exemption; no additional exemption available.
- A person who gave $0 before 2026 and dies in 2026 has full $7M exemption available.
Anti-clawback regulations
The Treasury issued anti-clawback regulations (T.D. 9884, finalized 2019; refined in 2022) to address the question: what happens to a gift made under the high exemption when the exemption later drops?
Anti-clawback rule: gifts made during the high-exemption period (2018-2025) are not “clawed back” into the estate at death if the exemption is lower at death. The gifts are permanently effective.
Example:
- Founder gives $13.99M in 2025 using full 2025 exemption.
- Exemption drops to $7M in 2026.
- Founder dies in 2030.
- Anti-clawback: the $13.99M gift is treated as using 2025 exemption at the time of the gift. It is not “pulled back” into the estate as a gift in excess of 2030 exemption.
- Founder’s estate benefits from the high-exemption use.
Without anti-clawback, the pre-sunset gift would have been problematic. With anti-clawback, the planning works as intended.
What’s still uncertain
Legislative risk. Congress could extend the TCJA exemption before year-end 2025, or could make it permanent, or could pass different tax legislation that increases, decreases, or freezes the exemption.
Gift tax rate changes. The current gift/estate tax rate is 40% on amounts above exemption. A future Congress could change this rate.
Basis step-up changes. Proposed “tax transfer at death” rules (Biden administration proposal, not enacted) would have eliminated the basis step-up. Not currently law but could be proposed again.
Gifting strategies for 2025
Founders and high-net-worth individuals are using various tools to lock in the exemption before year-end 2025:
SLAT to spouse/heirs. Use $13.99M to fund a SLAT. Spouse has lifetime access. See SLAT article for details.
IDGT + installment sale. Seed gift of 10% of sale value; balance via installment note. Uses minimal exemption. See IDGT article.
Dynasty trust. Fund multi-generational trust. Uses exemption for GST (generation-skipping transfer) tax as well. See dynasty trust article.
Direct gifts to heirs. Simple outright gifts. Uses exemption; no trust structure.
Charitable gifts. Don’t use gift exemption (charitable gifts are exempt from gift tax under §2522). But they reduce estate for estate tax purposes. Can be combined with other strategies.
The size sweet spot
For estates far below $7M (2026 estimate): sunset is irrelevant. No estate tax owed regardless.
For estates between $7M and $27.98M (married couple’s 2025 combined): sunset matters. Gifting before 2026 can lock in additional exemption.
For estates above $27.98M: exemption is already largely consumed for most planning vehicles. Additional gifting during the high-exemption period still helps by freezing value at current appraisal.
The largest absolute benefit of pre-sunset gifting is at the $7M-$13.99M per person range, where the sunset drops the available exemption by half.
Practical considerations
Timing of valuations. Gifts require valuation. For private company stock, obtain qualified appraisals reflecting the gift date. Valuations done well ahead of deadlines are easier.
IRS gift tax returns. Gifts over $18,000 annual exclusion (2024/2025) require Form 709. Significant gifts require detailed reporting.
Time for trust drafting. Irrevocable trusts (SLATs, IDGTs, dynasty trusts) require thoughtful drafting. Trust documents should be drafted and executed before funding. Rushing drafting in December is risky.
State gift tax. Some states (CT) have gift tax. Connecticut has a state gift tax exemption separate from federal; planning needs state-specific analysis.
Donor advised funds. Charitable contributions to DAFs are deductible for income tax, reduce estate. Immediate planning before year-end is possible but the DAF acceptance can take weeks.
Comparison: gifting in 2025 vs waiting until 2026
Couple age 55 with $30M estate:
Scenario A: Gift $27.98M to trusts in 2025 (combined exemption).
- Exemption used: $27.98M.
- Estate reduced to $2M (below 2026 exemption).
- Future appreciation in trusts outside estate.
- At death, estate tax: zero (under exemption).
- Savings over no planning: potentially $9-10M+ in estate tax.
Scenario B: Gift $14M to trusts in 2026 after sunset.
- Exemption used: $14M (both spouses).
- Estate: $16M (above 2026 exemption).
- Estate tax on $9M above exemption at 40% = $3.6M.
- Savings over no planning: less; exemption is smaller.
Pre-sunset gifting provides more exemption to use. Post-sunset, the exemption pool is smaller.
The “use it or lose it” framing
The IRS anti-clawback regulation creates specific language the estate planning community has adopted: “use it or lose it.”
“Use it”: make gifts before year-end 2025 using the high exemption. The amount used at that time is permanently credited to the donor’s exemption.
“Lose it”: by default, the exemption above $7M (after sunset) is gone. Gifts after sunset are limited by the lower exemption.
This framing has driven significant planning activity. Estate planners are typically fully booked for the back half of 2025 with clients doing pre-sunset funding.
Frequently asked
What if Congress extends the exemption? Gifts already made are unaffected. If a future Congress extends the exemption, those gifts still use the exemption as it was at the gift date.
What if my gifts are in trusts and the trust protector modifies them later? Grant of power of appointment or protector-initiated modifications generally don’t unwind the original gift. The gift is locked in at the original date.
Can I make a gift, then decide I want to un-make it? Gifts are irrevocable (as a matter of both gift tax and property law). A gift cannot be “taken back” without complex legal maneuvering.
Does the 2026 sunset affect generation-skipping transfer (GST) tax? Yes. GST exemption is tied to the gift and estate exemption; same amounts, same sunset.
What about the federal gift tax annual exclusion? The annual exclusion (2025: $18,000 per donee) is separate. It continues regardless of the lifetime exemption sunset.
Next step
If you have a taxable estate and have not yet made substantial gifts, discuss the 2025 sunset with estate counsel immediately. April 2026 is after the sunset date; pre-sunset planning opportunities have passed. Post-sunset, evaluate 2026 planning with the new $7M exemption in mind: still meaningful for many families, just at a smaller scale than the pre-2026 window offered.
Nineteen years doing trusts and estates work for tech wealth in the $15M to $200M range. Reviews VestedGrant's estate planning content.
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