Estate Tax 2026 Sunset: What Happens If Congress Doesn't Act

For decades, the estate tax has been a major concern for high-net-worth families and business owners planning to pass wealth to the next generation. In 2017, the Tax Cuts and Jobs Act (TCJA) dramatically increased the estate tax exemption, but it included a sunset clause: the exemption was set to revert to pre-2017 levels on December 31, 2025. The Opportunity and Border Business Act (OBBBA) of 2026 extended the current exemption levels, preventing the sunset. But even with the extension, the estate tax remains a critical planning issue for anyone with significant assets. Here's exactly what changed, what didn't, and what you need to do now.

The Estate Tax Exemption: Pre-2017, 2017-2025, and 2026

Understanding the estate tax requires knowing how the exemption has evolved:

Pre-2017 (2001-2016)

• Individual exemption: $5.49 million (adjusted for inflation annually)
• Married couple exemption (portability): $10.98 million
• Top estate tax rate: 40%
• This relatively low exemption meant estates worth over $5.5 million faced a steep 40% tax on assets above the exemption.

2017-2025 (TCJA Era)

• Individual exemption: Doubled to approximately $10 million, then indexed for inflation annually
• 2024 exemption: $13.61 million per individual
• Married couple exemption (portability): $27.22 million
• Top estate tax rate: Still 40%
• This was a historic expansion—the exemption more than doubled, meaning far fewer families had to worry about estate taxes.

2026 (OBBBA)

• Status: OBBBA extended the 2017-2025 exemption levels indefinitely, preventing the revert to ~$7 million
• Individual exemption (indexed for 2026): Approximately $13.9 million
• Married couple exemption (portability): Approximately $27.8 million
• Top estate tax rate: 40%
• The extension is permanent under current law (unless Congress changes it again in the future)

Why the Sunset Mattered (And Why Extension Was Critical)

Here's the key concern that made the 2026 OBBBA extension vital:

Without OBBBA, here's what would have happened on January 1, 2026:

The exemption would have reverted to approximately $7 million per individual ($14 million for married couples, using 2026 inflation adjustments). This would have meant:

• An estate worth $25 million would have faced 40% tax on $18 million ($25M - $7M exemption), resulting in $7.2 million in estate taxes due nine months after death.
• A family business worth $40 million would have faced $13.2 million in estate taxes (40% of $33 million above the $7M exemption).
• A real estate portfolio worth $50 million would have triggered $17.2 million in estate taxes.

For context, in 2024 and 2025, fewer than 1,000 estates per year (out of 2.8 million deaths) owed any federal estate tax, because the $13.61 million exemption was so high. Had it reverted to $7 million, estimates suggested 10,000+ estates annually would suddenly owe estate tax—a 10x increase.

The OBBBA extension eliminated this shock. Families planning for 2026 and beyond no longer face a cliff where their exemption drops in half.

What Changed and What Didn't Under OBBBA

What Changed (Good News):

1. The exemption stays high. It remains at $13.9 million per individual ($27.8 million for MFJ), indexed for inflation each year.
2. No reversion to $7 million. The dramatic cliff of halving the exemption was avoided.
3. Portability is preserved. Married couples can still use both spouses' exemptions ($27.8 million total) if the first spouse dies and the surviving spouse files an estate tax return (Form 706) and elects portability.
4. Business succession relief is preserved. Techniques like valuation discounts (gift tax discounts for minority interests in LLCs, FLPs) remain available.

What Didn't Change (Challenges Remain):

1. The 40% tax rate is still there. Any estate above the exemption still owes 40% federal estate tax on the excess.
2. State estate taxes remain. Seventeen states plus DC have their own estate or inheritance taxes with much lower exemptions ($1M-$6M). OBBBA is federal only.
3. Income tax basis step-up was NOT extended. One of the TCJA provisions that was NOT extended by OBBBA was the "stepped-up basis" at death. However, stepped-up basis remains in effect under current law (unchanged since before TCJA). There has been legislative pressure to eliminate it, but OBBBA left it intact.
4. Generation-skipping transfer (GST) tax. The GST tax exemption also increased and is now extended, but it remains complex and poorly understood by many families.

Who is Actually Affected by Estate Taxes in 2026?

With a $13.9 million individual exemption, estate taxes affect a surprisingly small percentage of Americans:

Income/Wealth levels where estate tax becomes a consideration:

• Net worth $13.9M - $25M (individual): Estate tax is a real possibility but can often be avoided with planning
• Net worth $27.8M+ (married couple): Estate tax is almost certain without planning
• High-net-worth business owners: Even those under $13.9M may be affected if their business is valued at a high multiple

Professions/occupations most commonly affected:

• Successful entrepreneurs (founders of tech companies, real estate developers)
• Physicians, dentists, attorneys with high net worth
• Multi-generational family business owners
• Real estate investors with large portfolios
• Investors with significant stock/investment holdings

Demographics: Approximately 99.8% of estates pay no federal estate tax. Only about 3,500 to 6,000 estates annually (out of 2.8 million deaths) file a federal estate tax return, and many of those owe zero tax after utilizing exemptions and deductions.

State Estate and Inheritance Taxes: The Real Threat in 2026

While OBBBA solved the federal estate tax cliff, many high-net-worth individuals still face significant state estate taxes:

States with Estate Taxes (exemptions range $1M-$6.2M):

• Massachusetts ($1 million)
• Connecticut ($6.2 million, indexed)
• Delaware ($5.85 million)
• Illinois ($4 million)
• Maine ($6.2 million, indexed)
• Maryland ($5 million)
• Minnesota ($3 million)
• New Jersey ($6.86 million, indexed)
• New York ($6.94 million, indexed)
• Oregon ($1 million)
• Rhode Island ($6.2 million, indexed)
• Vermont ($6.2 million, indexed)
• Washington ($2.193 million, indexed)

States with Inheritance Taxes (tax on heirs receiving property):

• Iowa (5-15%)
• Kentucky (4-16%)
• Maryland (10-16%, plus state estate tax)
• Nebraska (1-18%)
• New Jersey (inheritance tax, plus state estate tax)
• Pennsylvania (4.5-15%)

Example: A New York resident with a $35 million estate faces:

• Federal estate tax: $0 (below combined exemption for most scenarios with portability)
• New York state estate tax: 40% of amounts above $6.94 million exemption = approximately $11.2 million in state taxes
• Total estate tax: ~$11.2 million to New York State

For this reason, wealthy residents of estate tax states often consider relocating to states like Florida, Texas, or Nevada before death.

Key Estate Tax Concepts to Understand

1. The Annual Exclusion ($19,000 for 2026)

You can give up to $19,000 per person per year ($38,000 if married, splitting gifts) without using any exemption or filing a gift tax return. This is one of the most underutilized tax planning tools.

Example: A couple with three children and five grandchildren can give:

• $38,000 × 8 people = $304,000/year completely tax-free
• Over 20 years = $6.08 million transferred to the next generation tax-free
• This dramatically reduces the taxable estate.

2. Portability: The Spouse's Unused Exemption

When the first spouse dies, the surviving spouse can "inherit" the deceased spouse's unused exemption amount by filing Form 706 (estate tax return) and electing portability. This allows married couples to effectively double their exemption.

Example:

• Spouse A dies in 2026 with $10 million in assets (uses no exemption)
• Spouse B now has access to both Spouse A's $13.9M exemption AND her own $13.9M exemption = $27.8M total
• Spouse B can give away $27.8 million before owing any federal estate tax

3. Irrevocable Life Insurance Trusts (ILITs)

Life insurance proceeds are normally included in your taxable estate. An ILIT is a trust that owns life insurance on you. The proceeds pass outside your estate, providing liquidity to pay estate taxes.

Example:

• You create an ILIT and gift $20,000/year into it for 10 years ($200,000 total, using annual exclusions)
• The ILIT buys a $1 million life insurance policy on you
• When you die, the $1M passes to the ILIT and is NOT included in your taxable estate
• This keeps your estate smaller and avoids estate tax on that $1M

4. Grantor Retained Annuity Trusts (GRATs)

A GRAT is an advanced estate planning technique where you place appreciated assets into a trust for a term (2-10 years). You receive annuity payments during the term, and remaining assets pass to heirs tax-free if you survive the term.

Example:

• You put $5 million of stock in a GRAT for 5 years
• The stock appreciates to $10 million
• You receive annuity payments of about $1 million/year for 5 years
• At the end, the $10 million passes to your children with minimal (or zero) gift tax
• The $5 million appreciation is effectively transferred to the next generation tax-free

5. Charitable Remainder Trusts (CRTs)

A CRT allows you to donate appreciated assets to a trust, receive income for life, and leave the remainder to charity. This generates an immediate charitable deduction, reduces your taxable estate, and avoids capital gains tax on the appreciated assets.

Example:

• You donate $5 million of appreciated real estate to a CRT
• You receive 5% of the trust value annually ($250,000/year)
• Upon your death, the remainder goes to your designated charity
• You get an immediate charitable deduction of approximately $2-3 million
• You avoid capital gains tax on the $3 million appreciation

What You Should Do Now (Action Steps for 2026)

If Your Net Worth is $13.9M - $25M (Individual) or $27.8M+ (Married):

1. Calculate your net worth accurately. Include all assets: real estate, retirement accounts, life insurance, business interests, stocks, bonds, and alternative investments. Overvaluation or undervaluation will undermine planning.

2. File a will and durable power of attorney. Don't delay—these documents are foundational. Consult an estate planning attorney licensed in your state.

3. Consider a revocable living trust. In many states, this avoids probate and can provide privacy. It doesn't reduce estate taxes, but it's important for a smooth transition.

4. Implement annual exclusion gifting. Start gifting $19,000/person/year to your children and grandchildren immediately. This is simple and tax-free. Over 10-20 years, you can transfer hundreds of thousands of dollars.

5. Review portability planning. If married, ensure your estate plan provides for portability election and that your executor knows to file Form 706 when the first spouse dies. Even if no tax is owed, the filing preserves portability.

6. Evaluate advanced techniques. If your net worth exceeds $25M, work with a CPA and estate planning attorney to evaluate GRATs, ILITs, family limited partnerships (FLPs), charitable remainder trusts, or donor-advised funds (DAFs).

7. Check state estate taxes. If you live in an estate tax state, consider whether relocating before death makes sense financially.

8. Review beneficiary designations. Life insurance, retirement accounts (IRAs, 401ks), and other accounts pass outside your will via beneficiary designation. Ensure these align with your estate plan.

If Your Net Worth is $5M - $13.9M:

1. Plan conservatively. Even though you're likely below the current exemption, inflation adjustments and market growth could push you over the line by the time you die.

2. Make annual gifts. Start using the $19,000 annual exclusion now to gradually move wealth to the next generation.

3. Establish a revocable living trust. Even though estate taxes may not be an issue, probate avoidance and privacy matter at this level of wealth.

If Your Net Worth is Under $5M:

1. Focus on basic planning. A will, health care proxy, and power of attorney are essential. Estate taxes are not a concern.

2. Revisit estate planning every 5-10 years. As your wealth grows, update your plan accordingly.

Key Takeaways

1. OBBBA extended the current estate tax exemption ($13.9M individual, $27.8M married) indefinitely. The cliff where exemptions would have halved on January 1, 2026, was avoided.

2. Federal estate tax remains a concern for only the wealthiest ~0.2% of Americans, but high-net-worth families should still plan strategically.

3. State estate taxes are a bigger threat for many high earners in Massachusetts, Connecticut, Illinois, New York, New Jersey, Maryland, and other estate tax states.

4. Annual exclusion gifting ($19,000/person/year) is the easiest estate tax reduction strategy and should start immediately.

5. Advanced techniques (GRATs, ILITs, charitable trusts, FLPs) can dramatically reduce estate taxes for those with net worth over $25 million.

6. The stepped-up basis at death remains in effect, meaning heirs inherit assets at their fair market value at death, erasing embedded gains—a major estate tax advantage.

If your net worth is above $10 million, consult an estate planning attorney and CPA this year to implement a comprehensive plan. The OBBBA extension gives you more runway, but planning should not be delayed.