Estate Tax Sunset 2026: The $14M-to-$7M Exemption Cliff and the SLAT, GRAT, and IDGT Strategies to Lock In Now

Among the most consequential provisions of the Tax Cuts and Jobs Act of 2017 was the doubling of the federal estate and gift tax exemption — from approximately $5.5M per person in 2017 to over $11M per person in 2018, indexed annually for inflation thereafter. For 2025, the exemption stands at approximately $13.99M per person ($27.98M per married couple), allowing high-net-worth families to transfer extraordinary wealth without federal estate or gift tax.

This provision, like much of TCJA, is scheduled to sunset on December 31, 2025. Without legislative action, the exemption will revert to approximately $7M per person ($14M per couple) starting January 1, 2026. For families above the post-sunset threshold, the planning window to lock in the higher exemption is closing rapidly.

The Use-It-or-Lose-It Mechanic

The estate and gift tax exemption is unified — meaning lifetime gifts and estate-at-death transfers draw from the same exemption pool. The IRS issued anti-clawback regulations under §2010(c) confirming that gifts made under the higher exemption will not be "clawed back" if the donor dies after the exemption has fallen.

This creates a powerful planning opportunity: high-net-worth families can use the higher exemption now through lifetime gifts, locking in the larger transfer free of estate tax — even if the donor lives past the 2026 sunset.

Critically, the IRS position is that the exemption used is the exemption actually applied to the gift. A donor with $14M of exemption who makes a $7M gift in 2025 has used $7M of exemption — leaving $7M of remaining exemption. If the exemption falls to $7M in 2026, the donor has used all of it. To capture the "extra" $7M of exemption, the donor must make a gift of more than $7M before sunset.

Annual Exclusion Gifts

Separate from the lifetime exemption, the annual gift tax exclusion allows tax-free gifts of up to $19,000 per recipient per year ($38,000 for couples splitting gifts) in 2025. Annual exclusion gifts:

• Do not consume any lifetime exemption.

• Do not require gift tax return filing if within the limit.

• Can be made to unlimited recipients.

• Combined with the 5-year gift averaging election for 529 plan contributions, can produce substantial tax-free transfers.

Spousal Lifetime Access Trust (SLAT)

The Spousal Lifetime Access Trust is one of the most popular vehicles for using the increased exemption while retaining indirect access to the assets. The mechanics:

• Spouse A creates an irrevocable trust for the benefit of Spouse B (and potentially descendants).

• Spouse A makes a gift to the SLAT, using lifetime exemption.

• Trust assets and future appreciation are removed from Spouse A's estate.

• Spouse B can receive distributions for support, providing indirect access for Spouse A through the marital relationship.

For couples, both spouses can create SLATs for each other — but the trusts must be sufficiently different to avoid the "reciprocal trust doctrine," which would treat the arrangement as if each spouse held assets in their own estate. Differences typically include trustee selection, distribution standards, beneficiary classes, and timing.

Dynasty Trusts

A dynasty trust is designed to last for multiple generations — limited only by the rule against perpetuities (or, in states without that rule, perpetually). Properly drafted, a dynasty trust can:

• Hold assets outside the federal estate tax for many generations.

• Be allocated GST exemption to also escape Generation-Skipping Transfer Tax.

• Provide creditor protection and divorce protection for descendants.

• Maintain family wealth governance across generations.

Several states (South Dakota, Nevada, Delaware, Alaska, Tennessee) have abolished or substantially extended the rule against perpetuities, making them preferred jurisdictions for dynasty trusts.

Grantor Retained Annuity Trust (GRAT)

A GRAT is a leveraged gifting vehicle particularly useful for transferring appreciation. The mechanics:

• Grantor transfers assets to an irrevocable trust.

• The trust pays the grantor a fixed annuity for a term of years.

• At the end of the term, any assets remaining in the trust pass to the remainder beneficiaries (typically children or trusts for descendants) free of additional gift tax.

The "zeroed-out GRAT" structure sets the annuity such that the present value of the annuity equals the value of the contribution — using zero exemption. Any appreciation above the §7520 hurdle rate (currently around 5%) accrues tax-free to the remainder beneficiaries.

GRATs are particularly powerful for assets expected to appreciate dramatically — pre-IPO stock, private business interests, real estate during recovery cycles. The grantor must survive the term for the GRAT to succeed.

Intentionally Defective Grantor Trust (IDGT) Sales

The IDGT sale combines gifting and selling techniques to leverage the exemption further:

1. Grantor creates an irrevocable trust for descendants, with the grantor treated as owner for income tax purposes (intentionally "defective").

2. Grantor "seeds" the trust with a small gift (typically 10% of the planned sale value).

3. Grantor sells appreciating assets to the trust in exchange for an installment promissory note at the AFR rate.

4. Trust pays grantor interest and eventual principal from cash flow generated by the sold assets.

5. Future appreciation accrues to the trust (and ultimately to descendants) outside the grantor's estate.

Because the trust is grantor for income tax purposes, the grantor pays income tax on trust earnings — effectively making additional tax-free gifts to the trust beneficiaries (the trust grows without paying its own tax).

Charitable Lead Annuity Trust (CLAT)

For families with substantial charitable intent, the CLAT structure transfers wealth to descendants while satisfying philanthropic goals:

• Grantor establishes an irrevocable trust.

• Trust pays an annuity to a charity for a term of years.

• At the end of the term, remaining assets pass to descendants.

The charitable annuity reduces the gift's value for transfer tax purposes — potentially zeroing out the gift tax even on multimillion-dollar transfers. Like GRATs, CLATs benefit from low §7520 rates.

Generation-Skipping Transfer (GST) Exemption

The GST exemption — also at approximately $13.99M per person for 2025 and similarly scheduled to be cut roughly in half in 2026 — protects transfers to grandchildren and more remote descendants from the additional 40% GST tax. Allocating GST exemption to dynasty trusts and other multi-generational vehicles is a critical planning step.

State Estate Tax Considerations

Twelve states and the District of Columbia impose their own estate or inheritance taxes, generally with much lower exemption thresholds than the federal level. Key high-tax states include:

• Massachusetts: $2M exemption.

• Oregon: $1M exemption.

• Washington: $2.193M exemption.

• Hawaii: $5.49M exemption.

• New York: $6.94M exemption with the famous "cliff" — exemption disappears entirely at 105% of the threshold.

• Illinois: $4M exemption.

For residents of these states, lifetime gifting and other planning techniques become valuable even at wealth levels well below the federal threshold.

Discount Planning

Transfers of interests in family limited partnerships, family LLCs, or closely-held businesses can be valued at discounts for lack of marketability and lack of control. Properly structured, these discounts (often 25-40%) effectively expand the exemption — $13.99M of exemption can transfer assets worth $20M+ at fair market value before discount.

Discount planning faces continued IRS scrutiny but remains a viable strategy when supported by legitimate business purposes and proper appraisals.

The "Use-It Window" — 2025 Deadlines

For families intending to use the higher exemption before sunset, several practical deadlines apply:

• Trust formation: Drafting and executing irrevocable trusts requires several weeks at minimum; complex structures take months.

• Asset valuation: Appraisals of business interests, real estate, and other illiquid assets take 4-12 weeks.

• Gift execution: Funding decisions, asset transfer mechanics, and documentation must be completed by December 31, 2025.

• Gift tax return: Due April 15, 2026 (extendable to October 15).

Many estate planning attorneys are now recommending clients engage by Q2 2025 to ensure execution capacity before year-end.

Common Mistakes

• Waiting until late 2025 to begin planning (too late for complex structures).

• Failing to use the additional exemption before 2026 (the additional capacity is lost).

• Reciprocal trust mistakes when both spouses create SLATs.

• Inadequate valuation documentation supporting discounts.

• Failing to coordinate state estate tax planning with federal planning.

• Missing the GST exemption allocation, exposing later generations to GST tax.

• Funding GRATs with assets that don't appreciate (no transfer benefit).

Bottom Line

For families with net worth approaching or exceeding the post-sunset $7M per-person threshold, the 2025 planning window is among the most consequential estate planning opportunities of the past decade. The mechanics are technical, the structures are complex, and the deadlines are absolute. A coordinated plan involving estate counsel, CPA, and investment advisors — initiated well before year-end 2025 — is the difference between locking in the additional exemption permanently and watching that opportunity expire.