Federal Estate Tax in 2026: TCJA Sunset, Spousal Deduction, and What to Do Now

The 2026 Cliff That Most Families Are Not Prepared For

The Tax Cuts and Jobs Act of 2017 temporarily doubled the federal estate tax exemption. Without new legislation, that doubled exemption expires after December 31, 2025. Estates that were safely below the exemption threshold under the current rules could face a meaningful tax bill under the reverted figures.

This is not a problem only for the ultra-wealthy. A combination of a paid-off home, retirement accounts, life insurance, and investment savings can push a surviving spouse’s estate past the lower threshold, particularly in high-cost-of-living states. Understanding the tools available — the unlimited marital deduction, portability, and bypass trusts — is essential planning for couples over 55 with estates above $5 million.

IRS resources: irs.gov/businesses/small-businesses-self-employed/estate-tax

---

The Unlimited Marital Deduction: Powerful but Misunderstood

The unlimited marital deduction is the most valuable tool in estate planning for married couples. Assets passed directly to a U.S. citizen spouse at death escape federal estate tax entirely — regardless of amount.

The catch: this is a deferral, not elimination.

When the surviving spouse later dies, their estate faces estate tax on everything above the exemption, including what they inherited. Leaving everything outright to a spouse can result in a larger estate tax bill at the second death.

Strategies to Avoid the Second-Death Trap

1. Bypass Trust (Credit Shelter Trust)

The first spouse places assets up to the exemption into a bypass trust. Those assets grow outside the surviving spouse’s estate and pass to children free of estate tax at the second death.

2. Portability Election

If the first spouse’s estate files a timely estate tax return, the surviving spouse can “port” the unused exemption — in effect combining both spouses’ exemptions. This must be elected on a timely-filed return (Form 706), even if no tax is owed.

Critical: Portability is not automatic. Many families miss this filing and lose the first spouse’s unused exemption permanently.

---

TCJA Sunset: The Numbers

If TCJA expires as scheduled:

Year	Per-Person Exemption (estimated)	Married Couple Combined
2025	~$13.9 million	~$27.8 million
2026 (sunset)	~$7 million	~$14 million

A couple with a combined estate of $16 million would owe no federal estate tax under 2025 rules but could owe approximately $900,000–$1.2 million in estate tax if the exemption reverts and no planning is done. (This is a general illustration; actual liability depends on deductions, state taxes, and other factors.)

---

Worked Scenarios

Scenario A: Surviving Spouse with a $9 Million Estate (Post-Sunset)

• Surviving spouse inherits everything from deceased spouse under marital deduction
• Surviving spouse’s total estate at death: $9 million
• Federal exemption (post-sunset): ~$7 million
• Taxable estate: $2 million
• Estate tax at 40% rate: ~$800,000

What proper planning could have done:

• Deceased spouse uses bypass trust funded with $7 million
• Surviving spouse keeps $2 million (below exemption threshold)
• Estate tax at second death: $0

Scenario B: Making Gifts Before the Sunset

• Couple has estate of $22 million
• Each spouse gifts $6 million to irrevocable trusts for children (total $12 million gifted)
• IRS confirmed anti-clawback rule: gifts made while exemption was high are locked in
• Remaining estate: $10 million — within combined post-sunset exemption if portability is elected
• Estate tax: significantly reduced

---

State Estate Taxes: The Hidden Exposure

A family that carefully stays under the federal exemption may still face a state estate tax. States with lower exemptions include (figures approximate, verify current law in each state):

State	Approximate Exemption
Massachusetts	$2 million
Oregon	$1 million
Washington	$2.193 million (2024 figure)
Illinois	$4 million
Maryland	$5 million

For estates between $1 million and $7 million, state estate planning is often more urgent than federal planning.

---

The Conventional Advice That Deserves Skepticism

Estate planning attorneys routinely recommend giving everything to the surviving spouse outright because “it avoids immediate tax.” That is technically correct but incomplete advice.

In practice, combining both spouses’ assets in one estate at the second death — especially with projected investment growth — often creates a larger tax bill than if the first spouse had used a bypass trust. The “just give it to your spouse” approach is simple but can be the most expensive long-term choice.

The better question is: what is the projected size of the surviving spouse’s estate at the time of their death? If that projected figure exceeds the exemption, planning now at the first death is almost always cheaper.

---

Practical Steps to Take Before the Sunset

1. Estate audit: calculate the combined value of all assets, including retirement accounts and life insurance death benefits
2. Review beneficiary designations: retirement accounts and life insurance pass outside the will — update them
3. Consider pre-sunset gifts: work with an estate attorney on annual exclusion gifts and potentially larger taxable gifts that use the elevated exemption
4. Check portability filing requirements: if a spouse has died recently and no Form 706 was filed, the portability election may still be available under IRS relief procedures
5. Evaluate bypass trust vs portability: the right choice depends on your state’s estate tax, the growth potential of assets, and whether remarriage is possible

---

---

The Real Cost of Inaction: Quantifying What Failure to Plan Costs

Estate planning conversations often stall because the costs of inaction are abstract and the planning process feels uncomfortable. Making the cost concrete is the most effective motivation.

Running the Numbers on a Typical Upper-Middle-Class Estate

Consider a married couple with the following assets:

• Primary residence: $850,000 (paid off)
• Investment accounts: $1,200,000
• IRA/401k: $900,000
• Life insurance death benefit: $500,000
• Total combined estate: $3,450,000

Under current law (2025, pre-sunset): Combined exemption of approximately $27.8 million. No federal estate tax. State estate tax depends on state.

Under post-sunset law (2026, if no action): Per-person exemption approximately $7 million, combined approximately $14 million. Still no federal estate tax for this estate — the $3.45M is well below the post-sunset combined threshold.

Now consider the same couple with higher assets (common in high-cost-of-living areas):

• Primary residence: $2,800,000
• Investment accounts: $4,500,000
• IRA/401k: $2,000,000
• Life insurance: $1,500,000
• Total: $10,800,000

Under 2025 law: No federal estate tax (below combined exemption). Under post-sunset 2026: If one spouse dies and everything passes to the surviving spouse via marital deduction, the surviving spouse’s estate is $10.8 million. With a single post-sunset exemption of $7 million and no portability elected, the taxable estate is $3.8 million at 40%: approximately $1.52 million in federal estate tax.

The same couple with bypass trust and portability election: The first spouse’s $7 million exemption is used via bypass trust. The surviving spouse holds $3.8 million, below the $7 million exemption. Federal estate tax: $0.

The difference is approximately $1.52 million — lost through inaction.

The Opportunity Cost of Waiting

Estate tax planning is time-sensitive because:

1. Health changes limit your ability to make certain transfers (you cannot make deathbed gifts and expect full tax benefits)
2. Trust drafting and funding takes time — weeks to months for complex structures
3. The pre-sunset gifting window (before December 31, 2025) may not reopen
4. Values of assets (particularly real estate and closely-held business interests) may be lower now than in the future, making gifts cheaper in terms of gift tax valuation

The calendar pressure is real for estates above $7 million. Planning that should have begun in 2024 is urgent in 2025.

---

Retirement Account Inheritance: A Often-Overlooked Estate Tax Intersection

Retirement accounts (IRAs, 401(k)s, 403(b)s) are included in your taxable estate at death. But they also carry embedded income tax liability — making their estate planning treatment unique.

The Double Tax Problem

When a non-spouse inherits a traditional IRA or 401(k), they face two taxes:

1. Estate tax: The account balance is included in the decedent’s taxable estate
2. Income tax: The beneficiary must pay ordinary income tax as they withdraw the funds (under SECURE 2.0 rules, most non-spouse beneficiaries must empty the account within 10 years)

For a $500,000 IRA inherited by a child in a 37% income tax bracket, in an estate at the 40% estate tax rate: the combined effective tax rate on those dollars can be extremely high — though IRC Section 691(c) does provide an income tax deduction for estate tax paid on the IRD (Income in Respect of a Decedent).

Strategies for Retirement Account Inheritance

Roth conversion during life: Converting traditional IRA assets to Roth while you are alive eliminates the income tax burden for beneficiaries (Roth IRAs pass income-tax-free). The conversion generates income tax for you now — ideally in a year when your rate is lower than the beneficiary’s anticipated rate.

Charitable bequest of retirement accounts: Charities do not pay income tax on inherited IRAs. Leaving retirement accounts to charity eliminates both the income tax and estate tax on those dollars. Leave other (non-IRA) assets to human beneficiaries who get the step-up in basis benefit.

Spouse as primary beneficiary: A surviving spouse can roll the inherited IRA into their own IRA, continuing tax-deferred growth and delaying required minimum distributions. This is generally the best first beneficiary choice for retirement accounts.

Naming a trust as IRA beneficiary: Permissible but complex. The trust must be structured as a “see-through trust” to use the individual beneficiaries’ life expectancies for RMD calculation. Errors in trust drafting can accelerate the distribution timeline dramatically. Specialist estate and tax attorney review is essential.

---

How to File for Portability: A Step-by-Step Guide

Portability is a powerful tool that many families lose simply because they did not know to file. Here is what to do.

Who Needs to File for Portability

Any married couple where one spouse has died and the estate was below the filing threshold — but the surviving spouse has future estate tax exposure — should consider filing for portability.

Example: A couple with combined assets of $12 million. First spouse dies, leaving $6 million to the surviving spouse via the marital deduction. No estate tax is owed on the first death. But the surviving spouse now has $6 million — above the post-sunset individual exemption of approximately $7 million. Wait: they are close to the threshold and estate values can grow. Filing for portability to claim the first spouse’s DSUE gives the surviving spouse a combined exemption of approximately $14 million.

What You Must Do

1. File IRS Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) for the deceased spouse’s estate, even if no tax is owed
2. File within 9 months of death (automatic 6-month extension available, bringing total to 15 months)
3. Include the Portability Election — the portability election is made simply by filing the Form 706; there is no separate form
4. If you missed the deadline: The IRS has issued Revenue Procedure 2022-32, which allows estates to claim portability up to 5 years after the decedent’s death if no estate tax return was previously required to be filed. This procedure was made permanent and is widely used to recover portability elections that were inadvertently missed

What Happens to the DSUE

The Deceased Spouse’s Unused Exemption (DSUE) is added to the surviving spouse’s own exemption at the time of the second death. If the surviving spouse remarries and the new spouse predeceases them, the DSUE from the most recent deceased spouse applies (not cumulative from multiple spouses).

Important implication: The DSUE amount locks in at the first spouse’s death — it does not grow with inflation. If assets appreciate significantly before the surviving spouse’s death, planning for the use of the DSUE (through gifts, for example) may be advantageous.

---

Gift Giving as an Estate Reduction Strategy: Mechanics and Risks

Pre-sunset gifting is the most discussed estate planning strategy in 2025-2026. But gifting has costs and risks that require attention.

Annual Exclusion Gifts

Each person can give up to $18,000 per recipient per year (2024 figure; verify current year at irs.gov) without using any lifetime exemption. A married couple can double this to $36,000 per recipient through gift splitting.

For a couple with 3 adult children: $36,000 × 3 = $108,000 per year removed from the taxable estate with no gift tax cost. Over 10 years, this removes $1,080,000 from the estate.

Practical limitation: Annual exclusion gifts cannot be made to trusts unless the trust includes special provisions (Crummey notices). Most outright gifts to adult children or grandchildren qualify.

Taxable Gifts Using the Elevated Exemption

For larger wealth transfers, making taxable gifts now (while the exemption is elevated) locks in a higher exemption than will be available after sunset.

The anti-clawback rule: IRS final regulations (Treasury Reg. §20.2010-1(c)) confirm that gifts made during the high-exemption period are not “clawed back” — they do not become taxable if the exemption later drops below the gift amount. This protection applies to gifts made after December 31, 2017.

Mechanism: Make a gift from your estate to an irrevocable trust for your children or other beneficiaries. The gift removes the assets from your taxable estate. Future appreciation of those assets also escapes estate tax. The trust continues to benefit your family.

Risks of large gifts:

• Loss of step-up in basis: assets gifted during your lifetime do not receive a step-up in basis at your death. If the asset has significant unrealized gains (a low-basis stock position, for example), the recipient’s capital gains tax liability may exceed the estate tax savings. Analysis required.
• Loss of control: irrevocable means irrevocable. Assets in these trusts are beyond your reach.
• Gift tax return required: gifts exceeding the annual exclusion require filing IRS Form 709 (Gift Tax Return), due April 15 of the following year

---

Generation-Skipping Transfer (GST) Tax: The Second Layer

For families transferring wealth across multiple generations, the GST tax adds a second layer of taxation that requires coordinated planning.

When GST applies:

• Direct skips: outright transfers to grandchildren or more remote descendants
• Taxable distributions from a trust to a skip person
• Taxable terminations: when a trust terminates and the assets pass to a skip person

GST rate: 40% — the same as the top estate tax rate. Applied in addition to, or instead of, estate/gift tax depending on the structure.

GST exemption: Mirrors the estate tax exemption — approximately $13.9 million per person in 2025, dropping to approximately $7 million if TCJA sunsets. Both spouses’ GST exemptions can be used through proper planning.

Dynastic trusts: In states without a rule against perpetuities (Delaware, Nevada, South Dakota, and others), a trust can hold assets indefinitely, potentially moving wealth across multiple generations without triggering estate or GST tax at each generation. These structures are complex and primarily relevant for substantial wealth transfers.

---

State-Level Estate Planning: Often More Urgent Than Federal

For families with estates in the $3-8 million range, state estate tax — not federal estate tax — is often the immediate concern.

States with estate taxes and low exemptions (verify current law in each state, as these change):

State	Approximate Exemption	Top Rate
Massachusetts	$2 million	16%
Oregon	$1 million	16%
Washington	$2.193 million	20%
Illinois	$4 million	16%
Maryland	$5 million	16%
New York	$6.94 million	16%
Hawaii	$5.49 million	20%

Key differences from federal:

• Most states do not have portability — if the first spouse’s exemption is unused, it is lost
• The step-up in basis does not eliminate state estate tax liability
• “Cliff” effect in some states (Massachusetts, Oregon): if your estate exceeds the exemption by even $1, the entire estate is taxed, not just the excess

Planning for state taxes: Credit shelter trusts (bypass trusts) are essential in states without portability. A properly funded bypass trust uses the first spouse’s state exemption, preventing it from being wasted and reducing the second estate’s state tax burden.

---

Document Checklist: Estate Planning for Married Couples

Whether you work with an attorney or are reviewing existing documents, these items represent the estate planning floor for married couples with estates above $2 million:

Legal documents:

• Wills — both spouses, updated within the last 5 years or after major life changes
• Revocable living trust (if applicable) — ensures privacy and avoids probate
• Durable power of attorney — allows someone to manage your affairs if incapacitated
• Healthcare proxy / medical power of attorney
• Living will / advance directive — expresses medical treatment preferences

Beneficiary and ownership review:

• All retirement accounts (IRA, 401k): beneficiary designations current
• Life insurance policies: beneficiary designations current
• Real estate: title held in a way consistent with estate plan (joint tenancy, tenants in common, trust, or individual)
• Bank and brokerage accounts: payable-on-death or transfer-on-death designations

Tax filings to maintain:

• If a spouse has died: confirm whether Form 706 was filed to capture portability
• Gift tax returns (Form 709) filed for all years in which taxable gifts were made

---

Questions to Ask Your Estate Attorney Before the Sunset

• “Given the projected TCJA sunset, what is my current exposure if I die next year versus in 2027?”
• “Should I fund a bypass trust now, or rely on portability?”
• “Are there specific assets in my estate with low cost basis where gifting would trigger more capital gains tax than estate tax savings?”
• “Does my state have a separate estate tax? If so, does my will optimize for both federal and state?”
• “What is the most cost-effective trust structure for making a large gift before year-end?”

---

What the Step-Up in Basis Means Practically

One of the most valuable and least understood benefits in estate planning is the step-up in cost basis. When you die holding an appreciated asset — a stock purchased at $10,000 that is now worth $200,000 — your heirs inherit it at the $200,000 value. They pay zero capital gains tax on the $190,000 of appreciation that occurred during your lifetime.

This step-up is eliminated if you give the asset away during your lifetime. A gift of that same stock to your children carries your original $10,000 basis. When they sell at $200,000, they pay capital gains on $190,000.

The planning implication: for highly appreciated assets, dying with them — and using the estate tax exemption — can be more tax-efficient than gifting them, particularly if your estate is below the exemption level. Analysis with a tax advisor is essential before deciding to gift appreciated assets.

The Attorney-Client Conversation Most Families Avoid

Estate planning attorneys frequently report that clients arrive with the same misunderstandings. Addressing them here prevents wasted consultation time.

“We have a trust, so we don’t need to worry”: A revocable living trust is only effective for assets that have been funded into it. A trust that was created but never had the house, the investment accounts, or the bank accounts transferred into it provides no benefit. Trust funding — actually retitling assets and updating beneficiaries — is the step most families skip.

“The will takes care of everything”: Wills do not control assets that pass by beneficiary designation (retirement accounts, life insurance) or by joint tenancy. These assets pass directly to the designated beneficiary regardless of what the will says. A will leaving everything to your three adult children is overridden by a 20-year-old beneficiary designation naming only one of them on a $500,000 IRA.

“We’ll deal with estate tax when it happens”: Post-death estate tax planning options are extremely limited. The strategies that reduce estate tax liability — gifting, trust structures, Roth conversions — must be implemented during life. After death, the estate largely pays what the math produces.

---

Related Reading

• Inheritance Acceptance and Waiver Procedures
• Divorce Property Division and Contribution Method
• Workers Compensation Disability Grade and Claims
• Personal Rehabilitation vs Bankruptcy
• 4th Generation Medical Insurance Non-Covered Denial
• Inheritance Gift Tax Strategy
• Whole Life vs Term Insurance in Your 40s