Estate Tax Exemption 2026 Sunset: What Happens to the $13.61M Limit

January 1, 2026 Was the Biggest Deadline in Estate Planning History

The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the federal estate and gift tax exemption. For 2024, the exemption was $13.61 million per individual — $27.22 million for a married couple. That figure was always temporary. Under TCJA's sunset provision, the exemption reverted to its pre-2018 base level (approximately $5 million, indexed for inflation) on January 1, 2026 — estimated at roughly $7 million per individual. Families with estates between $7 million and $13.61 million suddenly faced potential federal estate tax liability where none had existed before. The marginal estate tax rate is 40%. The window to act before sunset — and debates about what actually happened legislatively — defined estate planning conversations throughout 2024 and 2025.

The Federal Estate Tax Framework

The federal estate tax is a tax on the transfer of wealth at death. It applies to the "taxable estate" — roughly, the fair market value of all assets owned at death plus taxable gifts made during life — above the applicable exclusion amount. The tax is unified with the gift tax: lifetime taxable gifts reduce the available estate tax exemption dollar-for-dollar.

Only about 0.1% of estates actually owe federal estate tax at any given time, but the absolute dollar amounts involved are large enough that planning for estates in the $5 million–$30 million range is nearly universal among estate planning attorneys.

The Anti-Clawback Regulation

A major concern before 2026 was whether gifts made using the higher TCJA exemption would be "clawed back" into the taxable estate if the donor died after the exemption reverted. The IRS addressed this in final regulations issued in November 2019: gifts made during the TCJA high-exemption window will not be subject to clawback at death. The estate gets the benefit of the higher exemption amount for gifts already made, even if the exemption at death is lower. This made gifting before the sunset deadline potentially valuable — gifts of up to $13.61 million per individual could be made and fully sheltered even if the exemption later dropped.

Portability: Protecting a Deceased Spouse's Unused Exemption

ERISA's portability election (available since 2011) allows a surviving spouse to add the deceased spouse's unused exemption amount (the DSUEA) to their own exemption. The executor of the deceased spouse's estate must file a timely federal estate tax return (Form 706) to elect portability — even if no tax is owed.

• Filing deadline for portability election: 9 months after death (18 months with extension)
• Simplified late portability election available up to 5 years after death under Revenue Procedure 2022-32
• The DSUEA is locked in at the exemption level in effect at the first spouse's death
• If the surviving spouse remarries and the second spouse dies first, the DSUEA from the first spouse is lost

Portability does not help with the generation-skipping transfer (GST) tax exemption — that is use-it-or-lose-it per individual and cannot be ported to a surviving spouse.

Gifting Strategies Before the Sunset

The combination of the anti-clawback rule and the higher TCJA exemption created an unusual opportunity: individuals could transfer up to $13.61 million gift-tax-free (beyond annual exclusion gifts already made), lock in permanent transfer tax savings, and remove future appreciation from the taxable estate.

Gift Tax Annual Exclusion Interaction

The $18,000 annual gift tax exclusion per recipient (2024) is entirely separate from and does not affect the lifetime exemption. Annual exclusion gifts are not reported on Form 709 and do not reduce the available lifetime exemption. Aggressive use of annual exclusion gifts — $18,000 to each child, child's spouse, and grandchild each year — can transfer substantial wealth over time entirely outside the estate and gift tax system.

Gift splitting with a spouse allows married couples to each be treated as making one-half of a gift, effectively doubling the annual exclusion to $36,000 per recipient even when only one spouse owns the asset. This requires both spouses to consent on Form 709 for the year of the gift.

This article is for informational purposes only and does not constitute legal advice.