The 2026 Estate Tax Sunset Is Now Close Enough to Plan Around

The Tax Cuts and Jobs Act of 2017 roughly doubled the federal estate and gift tax exemption, but did so on a sunset: absent legislative action, the exemption reverts on January 1, 2026 to its pre-2017 level, adjusted for inflation. The current best estimate is that the post-sunset exemption will land somewhere between $6.8 million and $7.2 million per individual, down from the 2024 level of $13.61 million.

Twelve months ago, we had this conversation with clients in the abstract. The answer then was that Congress might act, that the political picture was uncertain, and that aggressive gifting in anticipation of a sunset that might not happen carried its own costs. That analysis has shifted. With January 1, 2026 now roughly thirteen months away and no legislative vehicle in view that would extend the current exemption, the planning window is operational. For Connecticut families in the exposed band — roughly $7 million to $27 million of taxable estate — we are doing specific work with clients now, not talking about doing it later.

What the exposed band looks like in Connecticut

Connecticut does not have a state estate tax up to the federal exemption — Connecticut matched the federal exemption effective January 1, 2023, under Public Act 22-118 — which means the planning question for most Connecticut families is squarely a federal one. The band I am describing — roughly $7M to $27M of taxable estate — includes many Connecticut family situations: a successful professional couple with a Farmington Valley home, a 401(k) and pension rollover, and a closely-held family business or family-limited partnership. It also includes more substantial family wealth: a third-generation manufacturing business, a family-held real estate portfolio, a private-company founder anticipating a 2025 or 2026 exit.

Within that band, the planning calculus is fairly direct. If no gifts are made before December 31, 2025, and the sunset occurs as scheduled, the difference between the 2024 exemption and the post-sunset exemption — roughly $6.6M per individual, $13.2M per couple — becomes permanently ineffective for wealth transfer purposes. At a 40% federal estate tax rate, that translates to roughly $2.6M in potential federal estate tax exposure for an individual, $5.3M for a couple, that could have been transferred out tax-free.

The three planning tracks we are actually using

Track one: SLATs (spousal lifetime access trusts). For married couples in the exposed band, paired SLATs remain the dominant planning structure. Each spouse creates an irrevocable trust for the benefit of the other (and typically descendants), funds it with the bulk of the current exemption, and retains indirect access through the other spouse's trust. The structure allows the couple to lock in the current exemption before sunset while retaining a meaningful degree of financial flexibility.

The SLAT structure is not without risk — most obviously, the death of the non-grantor spouse removes the indirect-access path — and the drafting needs to be careful to avoid reciprocal-trust doctrine problems. We use asymmetric terms across the two trusts (different trustee structures, different distribution standards, different remainder beneficiaries) to reduce that risk.

Track two: direct gifts of business interests with discount valuations. For clients whose wealth is concentrated in a closely-held business, gifting minority or non-controlling interests in the business to a grantor trust — typically before a 2025 or 2026 liquidity event — can transfer substantial value at a discounted valuation. Valuation discounts for lack of marketability and lack of control remain available under the current Treasury regulations; the IRS continues to challenge aggressive discounting but accepts reasonable discount ranges for genuine minority interests in closely-held businesses.

For Connecticut clients with a contemplated sale in 2025 or 2026, the sequence matters: gift the minority interests first, then execute the sale, and the post-gift appreciation inures to the beneficiaries rather than to the grantor's taxable estate. The timing is tight, but it is doable.

Track three: GRATs, IDGTs, and QPRTs. For families in the higher end of the exposed band or above, the traditional discount-and-freeze structures — grantor retained annuity trusts, intentionally defective grantor trusts (usually funded by installment sale), qualified personal residence trusts — remain workable and can transfer significantly more than the exemption amount. These structures are more complex and require more carry-forward administration, and they generally work best in combination with direct exemption gifting rather than as a substitute for it.

A realistic timeline

For a client engaging with us in December 2024 or early 2025 who wants to execute a paired-SLAT strategy, a reasonable timeline is as follows:

• December 2024 – February 2025: Initial planning meetings, valuation work on any closely-held assets, review of existing estate plan and beneficiary designations.
• March – May 2025: Drafting of trust documents, coordination with financial advisors and accountants, preparation of gift tax returns.
• June – September 2025: Execution of trust documents, funding of trusts, filing of Form 709 gift tax returns as 2025 gifts.
• October – December 2025: Buffer for any issues or additional planning.

Clients who wait until mid-2025 to begin the conversation will have a much tighter execution window, and the valuation and drafting workstreams do not compress well. We are telling clients now that if they want to execute before the sunset, the decision to engage should happen in the first quarter of 2025 at the latest.

What about a legislative extension?

The short answer is: do not plan around one.

The fuller answer is that any legislative extension would require a vehicle moving through Congress, and the 2025 legislative calendar is likely to be dominated by budget and tax-extenders discussions that may or may not include the estate tax exemption. Even if an extension is included in a package, it may not happen in time for families to confidently defer their 2025 planning. The risk-adjusted approach is to plan as if the sunset will occur on schedule, with the understanding that gifts made under the current exemption are not un-done by a later legislative extension — they are simply made earlier than necessary, which is rarely a meaningful economic cost.

On flexibility and reversibility

One question clients always ask: what if circumstances change? What if the non-grantor spouse dies, what if there is a divorce, what if a beneficiary turns out to be a problem?

The answer is that irrevocable trusts are, by design, irrevocable — but they are not rigid. Trust protector provisions, decanting statutes (Connecticut's decanting statute is at Conn. Gen. Stat. § 45a-496h), grantor-trust toggles, and other modern trust-drafting tools give meaningful flexibility within an irrevocable structure. The trusts we are drafting for 2025 execution are not the trusts my father drafted in the 1980s. They are flexible enough to accommodate a wide range of future circumstances, and the drafting time is worth the flexibility.

For Connecticut families in or near the exposed band who want to discuss the 2026 sunset and the planning options, the T&E group is taking engagements now, with a priority queue for clients whose planning requires valuation work on closely-held businesses or real estate.