The federal estate tax exemption is scheduled to change under the Tax Cuts and Jobs Act (TCJA) of 2017.

Unless Congress changes the law, the federal lifetime gift and estate tax exemption is expected to decline from approximately $13.61 million per person in 2024 to an estimated $7 million per person in 2026, with amounts adjusted for inflation annually.

If a person dies after the change takes effect, the standard 40% federal estate tax rate would apply to the portion of a taxable estate above the available exemption. Treasury regulations provide anti-clawback protection for certain completed gifts, but proposed exceptions and the requirements for genuine operational separation make careful planning important.

Families considering lifetime transfers should coordinate with qualified tax and legal advisers well before the scheduled change.

The 2026 Estate Tax Exemption Change

For nearly a decade, individuals and family offices have operated under the higher exemption created by the TCJA. Unless the law changes, the exemption will return to a lower inflation-adjusted amount in 2026. The effect will depend on the size and composition of each estate, prior taxable gifts, portability elections, and other applicable factors.

A married couple using standard portability elections may currently combine individual exemptions of approximately $13.61 million each, or about $27.22 million in total based on 2024 figures. After the scheduled change, the combined amount is estimated at approximately $14 million, adjusted for inflation. The difference may increase the amount of an estate subject to federal transfer tax and may create a liquidity need for families whose wealth is concentrated in private equity, commercial real estate, or closely held businesses.

For families evaluating planning options before the sunset, the first step is understanding the applicable exemption and the potential tax exposure. The next is reviewing whether any proposed transfer is legally complete, properly valued, and independently administered.

Treasury Decision 9884 and the IRS Anti-Clawback Rule

When the TCJA was enacted, taxpayers and advisers considered whether a gift made while the exemption was higher could later be included in the estate if the donor died after the exemption declined. This issue is commonly referred to as a tax clawback.

Treasury finalized Treasury Decision 9884 in 2019. The regulations generally protect certain completed gifts made when the higher Basic Exclusion Amount (BEA) applied, so that the gift is not disadvantaged solely because the exemption is lower at death. The protection depends on the transfer meeting applicable legal and tax requirements; a document that does not reflect the parties' actual conduct may receive different treatment.

Proposed Exceptions to the Anti-Clawback Rule

The IRS and Treasury evaluate whether a transfer is genuine and complete, including whether the donor retained rights or control that could bring the property back into the taxable estate. In April 2022, Treasury published proposed regulations, REG-118913-21, addressing circumstances in which certain transfers may not receive the expected anti-clawback benefit.

The proposed rules focus in part on transactions covered by Internal Revenue Code (IRC) Section 2036. If a donor transfers an asset on paper but retains relevant control, enjoyment, income, or other rights, the transfer may be treated as incomplete for estate tax purposes. Families should have legal and tax advisers review both the documents and the way the arrangement is operated.

Structures Requiring Careful Review

• Promissory notes from intra-family transfers that remain substantially unsatisfied at the date of death.
• Grantor Retained Annuity Trusts (GRATs) or Qualified Personal Residence Trusts (QPRTs) when the donor dies during the retained term.
• Entity transfers where the founder retains voting rights, administrative authority, or unilateral digital access to commercial banking portals.
• Transactions subject to IRC Section 2035, including transfers completed within three years of the grantor's death where the statute applies.

Illustrative Scenario: Operational Control and Estate Tax Risk

The following is an anonymized illustrative scenario. In 2024, a founder of a real estate holding company transferred $10 million of commercial property to a Spousal Limited Access Trust (SLAT). Although the transfer documents were signed, the founder retained day-to-day administrative control and did not establish independent digital credentials for the trustee.

The founder also continued to access the trust's commercial operating account using an existing password and transferred funds between the trust and personal accounts. These actions created evidence that the founder continued to exercise operational control over property that had purportedly been transferred.

After the founder's death in 2027, the IRS auditor identified evidence of continued account access, commingled transactions, and retained control. If the transfer were treated as incomplete under IRC Section 2036, the $10 million could be included in the taxable estate. At the applicable exemption and 40% tax rate, the result could include an unexpected $3.2 million liquidity shortfall, depending on the estate's other assets, deductions, prior gifts, and applicable law.

Theoretical Legal Planning vs. Operational Execution

The gap between signing a trust agreement and actually operating it independently is where many families fail. Families considering a transfer should account for both the legal documents and the practical steps required to complete and maintain the arrangement. As discussed in how timing can affect an inheritance, execution deadlines and administrative details can influence the outcome.

A sound estate strategy requires verifiable transfer of digital access and control. As part of that operational process, Cipherwill helps users organize, secure, and transfer sensitive digital administrative information to designated fiduciaries. The platform can support documentation of access changes and custody procedures, while legal and tax advisers determine the requirements for a particular trust or transfer. When auditors request proof that you surrendered control, clear records of those procedures may help demonstrate how the arrangement was administered.

Common Mistakes When Preparing for a Sunsetting Exemption

A compressed legislative timeline can lead to organizational errors. Families should review these common issues with their advisers:

• Assuming an executed document establishes reality: A trust agreement is only one part of the arrangement. If the grantor can bypass the trustee or independently move trust assets using legacy credentials, the facts may undermine the intended transfer.
• Ignoring the valuation backlog: Transfers involving closely held businesses, Family Limited Partnerships, or other illiquid assets may require qualified third-party valuations. An incomplete or unsupported appraisal may cause the IRS to scrutinize the valuation or claimed discount.
• Overlooking state-level rules: Federal estate tax planning does not determine every state obligation. Many states have decoupled their estate or inheritance tax systems from federal exemption amounts, which can create unexpected state-level estate tax liability.

The financial impact of a transfer can depend not only on the legal framework but also on organizational execution. Clear procedures for transferring administrative authority and documenting access changes can help families and their advisers evaluate whether the intended arrangement was implemented and maintained.

A 2026 Exemption Planning Checklist

To prepare for the scheduled exemption change and evaluate any potential anti-clawback issues, consider the following steps with qualified legal, tax, and financial professionals:

1. Obtain valuations early: Engage qualified appraisers to value illiquid holdings, including Family Limited Partnerships and closely held operating companies.
2. Review irrevocable instruments: Work with qualified legal counsel to evaluate SLATs, intentionally defective grantor trusts, dynasty trusts, and other structures appropriate to your circumstances.
3. Separate digital administrative access: Establish documented procedures for transferring banking credentials, multifactor authentication, and software access to the appropriate independent fiduciary, without retaining unauthorized personal access.
4. Complete funding steps: Retitle real estate, obtain required Employer Identification Numbers (EINs), open appropriate accounts, and document capitalization under the trust or entity's name.
5. File required tax forms: Coordinate with a certified public accountant to prepare and timely file Form 709 and other required records, including documentation of the applicable gift tax exclusion.

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