The 2026 Estate Tax Exemption Sunset Didn't Happen — Here's What Did

If you spent 2024 or 2025 being told you had to act before the estate tax exemption was cut in half, this article is the update. The reduction was real, it was scheduled, and then it was cancelled.

What Was Supposed to Happen

The Tax Cuts and Jobs Act of 2017 roughly doubled the federal estate and gift tax exemption, but only temporarily. Those provisions were written to expire after December 31, 2025, at which point the exemption would revert to its pre-TCJA level adjusted for inflation — widely estimated at around $7 million per person.

That created a genuine deadline. Families with estates between roughly $7 million and $14 million, who owed no federal estate tax under the higher exemption, would have been exposed to a 40% tax on the difference. A large amount of planning between 2018 and 2025 was built around using the higher exemption before it disappeared.

What Actually Happened

On July 4, 2025, the One Big Beautiful Bill Act (Public Law 119-21) was signed into law. Section 70411 amended Internal Revenue Code § 2010(c)(3) to set the basic exclusion amount at:

• $15 million per individual
• $30 million per married couple

This applies to decedents dying and gifts made after December 31, 2025. The exemption is permanent — it has no scheduled expiration — and is indexed for inflation beginning in 2027.

The top federal estate tax rate is unchanged at 40% on amounts above the exemption.

"I Made Large Gifts in 2025 to Beat the Sunset — Was That a Mistake?"

Short answer: the exemption you used was not wasted.

Three things are true regardless of the law change:

• The assets you gifted are permanently outside your taxable estate, along with all of their future appreciation. That benefit does not reverse.
• There is no clawback. Gifts made under the higher exemption are not penalized or recaptured.
• The exemption you used was real exemption, applied to real transfers.

What is worth reviewing is whether those particular assets were the right ones to give away. Gifted assets generally do not receive a step-up in basis at death (see below), so giving away highly appreciated property can shift a capital gains cost onto your heirs. Whether that trade-off was worthwhile depends on the assets, your family's situation, and what has happened since.

That is a conversation to have with your attorney and CPA together, looking at your actual holdings. It is not something to decide from an article.

"I Didn't Do Anything — Did I Miss Out?"

No. There was no penalty for waiting, because the opportunity did not expire.

The higher exemption is now permanent rather than a closing window. If your estate is below $15 million per person, the sunset would not have affected you anyway. If it is above that, the planning tools are the same ones that existed before — they simply no longer carry an artificial deadline.

What Did Not Change

The Act changed the exemption. Several things people often assume changed did not:

	Status
Top federal estate tax rate	Unchanged at 40% above the exemption
Step-up in basis (IRC § 1014)	Unchanged. Assets in your estate at death still receive a new cost basis equal to fair market value
California state estate tax	None. Phased out in 2005 when the federal credit it relied on was repealed
California inheritance tax	None. California is one of 38 states with neither tax
Annual gift tax exclusion	$19,000 per recipient for 2026, unchanged from 2025. Couples can combine for $38,000
Proposition 19	Unaffected by this Act — and for most California families it costs far more than the estate tax ever would. See below

Proposition 19: The California Tax That Actually Costs You

The estate tax dominates the conversation. For most California families inheriting property, Proposition 19 costs more.

Prop 19 is California property tax law, not federal law. It was passed in 2020 and took effect in February 2021, and the One Big Beautiful Bill Act has no effect on it whatsoever. It did not change in 2025 and it did not change in 2026.

What it did was narrow the parent-child exclusion from property tax reassessment. Before Prop 19, a parent could transfer a primary residence of any value to a child with no reassessment, plus up to $1 million of assessed value in other real estate. After Prop 19, the requirements are considerably tighter.

Only the family home or family farm qualifies. Rental property, vacation homes, and investment property receive no exclusion at all — they are reassessed to full market value on transfer.

The child must occupy it as their principal residence within one year of the transfer, and must file the Homeowners' Exemption (BOE-266) within that same year.

The exclusion is capped. The excluded value is the parent's factored base year value plus $1,044,586 — the 2026 figure, indexed annually and in effect for transfers through February 15, 2027. Value above that cap is reassessed proportionally.

The claim form has its own deadline. A BOE-19-P must be filed within three years of the transfer, or within six months after a supplemental notice, whichever applies.

With multiple heirs, only one sibling can claim it. If three children inherit the family home and only one moves in, the exclusion is available to that one — the others do not each get their own.

The practical effect on a family holding long-owned California real estate is substantial. A property assessed at a fraction of its market value under Proposition 13 — because it has been in the family since the 1980s — can be reassessed to current market value on inheritance, permanently resetting the annual property tax bill. For a home worth $3 million with an assessed value of $400,000, the difference is not a one-time cost; it is a recurring annual increase that the next generation carries for as long as they hold the property.

That is a live tax consequence affecting ordinary California families with a single home. The federal estate tax, at a $15 million threshold, is not.

There is periodic activity aimed at changing Prop 19 — including a proposed "Repeal the Death Tax" ballot initiative aimed at the November 2026 ballot and SCA 4 in the Legislature. Neither is law. Both are pending, and pending measures frequently fail or change substantially. Plan around the rules as they stand today.

If you own California real estate you intend to pass to your children, Prop 19 planning is a more pressing question than the estate tax exemption. Our full treatment is in Proposition 19 and California property tax.

Portability Is Not Automatic — and Missing It Is Expensive

This is the part most people do not know, and it now carries more value than it used to.

A married couple does not automatically get a combined $30 million exemption at the second death. The surviving spouse can use the deceased spouse's unused exemption — the DSUE — but only by electing portability, and that election requires filing a federal estate tax return.

How it works

• First spouse dies with a $5 million estate against a $15 million exemption
• Unused exemption: $10 million
• The executor files Form 706 and elects portability
• The surviving spouse now has $15 million (their own) plus $10 million (DSUE) = $25 million

The requirement people miss

• Form 706 must be filed within nine months of death — even when no estate tax is owed. An extension is available.
• The election must actually be made on the return; filing alone is not enough.
• DSUE applies only to the most recently deceased spouse.
• Missing the election can forfeit up to $15 million of exemption.

Because the exemption is now larger, the amount at stake if the election is missed is larger too. A surviving spouse who does not file has given up an exemption worth up to $6 million in tax at the 40% rate.

What actually happens when the election is missed

The election is missed far more often than people expect, and the reason is structural: when a spouse dies with a modest estate, no estate tax is owed, so no one files an estate tax return. There is nothing to prompt it. The family settles the estate, the surviving spouse retitles the accounts, and the matter closes.

The consequence does not appear until the second death, often a decade or more later — and it appears to the children, not to the person who could have prevented it.

Consider a couple whose combined estate is $22 million, much of it in California real estate bought decades ago. The first spouse dies. The estate is well under the exemption, no tax is due, no Form 706 is filed. Nothing seems wrong.

When the surviving spouse dies years later, the estate has only one exemption available — $15 million, not $30 million. The $7 million above it is taxed at 40%: roughly $2.8 million, payable in cash within nine months of death. A family holding appreciated real estate rather than liquid assets may have to sell property to pay it.

Had the election been made at the first death, that liability would have been zero.

If the deadline has already passed

Late portability elections are permitted in some circumstances under IRS Revenue Procedure 2022-32 for estates that were not otherwise required to file a return. If your spouse died within the last several years and no Form 706 was filed, it may not be too late.

This is one of the few genuinely time-sensitive items left in estate planning after the 2025 change, and it is worth checking rather than assuming. If you are a surviving spouse and you do not know whether a Form 706 was filed, that is the question to bring to a first consultation.

Who Still Needs Federal Estate Tax Planning

Families with estates approaching or above $15 million per person or $30 million per married couple. For those estates the tools have not changed — irrevocable life insurance trusts, spousal lifetime access trusts, generation-skipping trusts, grantor retained annuity trusts, and charitable structures. What has changed is that none of them are deadline-driven any more.

If you are in that range, the relevant question is no longer "how fast can we act" but "what is the right structure" — a better question, and one worth taking time over.

The Reasons That Have Nothing to Do With Estate Tax

Here is the part that gets lost when the conversation is dominated by exemption thresholds: most of the reasons to use an irrevocable trust were never about estate tax at all. None of the following are affected by the exemption going up, and all of them apply to far more California families than a $30 million estate does.

Long-term care and Medi-Cal. The average cost of skilled nursing care in California runs well into six figures per year, and Medi-Cal has a recovery right against the estates of beneficiaries who received long-term care. A Medi-Cal asset protection trust can shield a home from that recovery. This has no connection to the estate tax exemption whatsoever, and it affects middle-class families far more than wealthy ones — a family whose entire net worth is a $900,000 house has more at risk proportionally than one with $30 million. See our guide to Medi-Cal planning and long-term care.

A beneficiary with a disability. If someone in your family receives SSI or Medi-Cal, leaving them money directly can disqualify them from benefits they depend on. A special needs trust provides for them without triggering that loss. Again: entirely unrelated to the estate tax, and the stakes are a lifetime of benefits rather than a tax rate.

Creditor and lawsuit exposure. Business owners, physicians, contractors, and real estate investors face liability that has nothing to do with the size of their estate. Asset protection planning addresses that risk directly, and a revocable living trust does not provide it.

Charitable intent with an income need. Charitable remainder trusts generate an income stream, a current charitable deduction, and deferral of capital gains on appreciated assets contributed to the trust — useful at asset levels far below the estate tax threshold.

Our breakdown of irrevocable trust types and costs is organised around exactly this distinction: which trusts serve long-term care and disability planning, which serve asset protection and charitable goals, and which are genuinely about federal estate tax. Only the last group is affected by the 2025 change.

For Everyone Else: The Step-Up in Basis Now Matters More

This is the practical takeaway for the large majority of California families, and it is the honest answer to "does estate tax planning still matter to me?"

For most people the answer is no — and something else matters instead.

If your estate is under $15 million per person, you were not going to owe federal estate tax under the old rules either. You certainly will not now. What does affect your family is capital gains tax, and for Californians who bought property decades ago the numbers involved are often larger than any estate tax would have been.

How the step-up works

Under Internal Revenue Code § 1014 — unchanged by the One Big Beautiful Bill Act — assets included in your estate at death receive a new cost basis equal to fair market value on the date of death. The appreciation that built up during your lifetime is simply never taxed as capital gain.

Take a Glendale home bought in 1985 for $180,000, worth $1.6 million today, with no mortgage.

	If you gift it during your lifetime	If your children inherit it
Child's cost basis	$180,000 (your original basis carries over)	$1.6 million (stepped up under § 1014)
Taxable gain if sold at $1.6M	$1,420,000	$0
Approximate combined federal and California tax	$400,000–$490,000	$0

The exact figure depends on the child's income and filing status, which drives both the federal capital gains rate and the California rate — California taxes capital gains as ordinary income, with no preferential rate. The point is the order of magnitude, and it is not small.

Now note what the estate tax would have been on that same house under either the old rules or the new ones: nothing. A $1.6 million estate is far below $7 million, let alone $15 million.

California's community property advantage

California married couples have an advantage here that couples in most states do not.

For community property, IRC § 1014(b)(6) provides a step-up on both halves of the asset when the first spouse dies — not just the deceased spouse's half. In a separate property state, only the decedent's 50% is stepped up and the survivor keeps their original basis on the rest.

Using the same house: if it is community property and one spouse dies, the surviving spouse's basis becomes the full $1.6 million immediately. If it were separate property, the basis would be roughly $890,000 — half stepped up, half original — leaving about $710,000 of built-in gain still exposed.

This is one of the most valuable features of California law for ordinary families, and it depends on how title and the trust are actually characterised. Our detailed treatment is in community property versus separate property in California estate planning.

What does not get a step-up

• Assets given away during your lifetime. The recipient takes your basis. This is the trade-off in every lifetime gifting strategy.
• Assets in a completed irrevocable trust, in most structures. Removing an asset from your taxable estate generally also removes it from § 1014 treatment. That is precisely the trade being made.
• Retirement accounts — traditional IRAs and 401(k)s. These are income in respect of a decedent and receive no step-up; beneficiaries pay ordinary income tax on withdrawals.

A revocable living trust does not affect basis at all. Assets in it remain part of your taxable estate for § 1014 purposes and receive the full step-up, while still avoiding probate. That combination — probate avoided, step-up preserved — is why a revocable trust remains the correct foundation for the overwhelming majority of California families.

The mistake to check for

Giving away highly appreciated property to avoid an estate tax you were never going to owe can cost your family more than it saves.

This is the single most common planning error that follows a period of deadline-driven advice. If you transferred appreciated California real estate out of your estate in 2024 or 2025 in response to sunset warnings, and your estate was never going to approach $15 million, the transfer may have traded a tax you did not owe for a capital gains bill your children will. That is worth reviewing — not necessarily undoing, since some transfers cannot be undone and others had good non-tax reasons, but understanding.

For more on how basis works when trust property is sold, see capital gains tax on selling trust property in California.

What California Families Should Do Now

• Estate under $15 million per person: focus on probate avoidance, incapacity planning, and preserving the step-up in basis. A revocable living trust does the first two without sacrificing the third.
• Surviving spouse, first spouse died recently: check whether Form 706 was filed and portability elected. If not, check whether Rev. Proc. 2022-32 relief is available.
• Estate above $15 million per person: the planning tools are unchanged and now permanent. See our guide to irrevocable trust types and costs.
• You made deadline-driven gifts in 2024–2025: review the basis consequences with your attorney and CPA. Nothing needs undoing, but it is worth understanding where you stand.

Frequently Asked Questions

Did the 2026 estate tax exemption sunset happen?

No. The sunset was cancelled. The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, amended Internal Revenue Code Section 2010(c)(3) to set the basic exclusion amount at $15 million per individual for decedents dying and gifts made after December 31, 2025. The exemption did not fall to approximately $7 million as previously scheduled — it went up.

What is the federal estate tax exemption in 2026?

$15 million per individual and $30 million per married couple. The top federal estate tax rate remains 40% on amounts above the exemption.

Is the higher estate tax exemption permanent?

Yes. The One Big Beautiful Bill Act made the $15 million exemption permanent rather than temporary, and it is indexed for inflation beginning in 2027. There is no scheduled expiration date, though Congress can change the law at any time.

I made large gifts in 2025 to beat the sunset. Was that a mistake?

The exemption you used was not wasted. The assets you gifted, and all of their future appreciation, are permanently outside your taxable estate. There is no clawback for gifts made under the higher exemption. Whether that was the best use of those assets depends on your specific circumstances, including whether you gave up a step-up in basis, and is worth reviewing with your attorney and CPA.

Does California have its own estate tax?

No. California has no state estate tax and no inheritance tax. The state estate tax was phased out in 2005 when the federal credit it relied on was repealed. California is one of 38 states with neither tax. California residents remain subject to the federal estate tax above the $15 million per person exemption.

What is the annual gift tax exclusion for 2026?

$19,000 per recipient for 2026, unchanged from 2025. A married couple can combine their exclusions to give $38,000 per recipient per year. This is separate from the lifetime exemption and does not reduce it.

Is portability automatic for married couples?

No. Portability must be elected, and the election requires the executor to file a federal estate tax return (Form 706) within nine months of death even when no tax is owed. Missing it can forfeit the deceased spouse's unused exemption — up to $15 million. Late relief is available in some cases under IRS Revenue Procedure 2022-32.

Who still needs federal estate tax planning?

Families with estates approaching or above $15 million per person, or $30 million per married couple. For everyone below those thresholds, the step-up in basis under Internal Revenue Code Section 1014 is generally the more valuable planning consideration.

Does the higher estate tax exemption change Proposition 19?

No. Proposition 19 is California property tax law and is entirely unaffected by the One Big Beautiful Bill Act, which is federal tax law. Prop 19 narrowed the parent-child exclusion from property tax reassessment: it now applies only to a primary residence, the child must generally make it their own primary residence within a year, and the exclusion is capped. Only the family home or family farm qualifies; rentals and vacation homes are fully reassessed. The child must occupy it within one year and file the Homeowners' Exemption, and the excluded value is capped at the parent's factored base year value plus $1,044,586 for 2026. Prop 19 is property tax law and does not affect the federal step-up in basis, which is separate. For most California families inheriting real estate, Prop 19 has a larger financial effect than the federal estate tax.

Do assets I give away during my lifetime get a step-up in basis?

Generally no. Assets transferred out of your estate during your lifetime keep your original cost basis in the recipient's hands, so the built-in capital gain transfers with them. Assets still in your estate at death receive a new basis equal to fair market value under Internal Revenue Code Section 1014. For California community property, Section 1014(b)(6) steps up both halves at the first spouse's death. This is the main trade-off to weigh before making large lifetime gifts of appreciated property.

Talk to a California Estate Planning Attorney

If you acted on sunset warnings, or held off because you were not sure, it is worth a conversation to see where the change leaves you. Most families will find the answer is simpler than they expected.

Law Offices of Rozsa Gyene — 450 N Brand Blvd, Suite 600, Glendale, CA 91203 (818) 291-6217 · Schedule a free consultation

Disclaimer: This article provides general information about federal estate and gift tax law and should not be construed as legal or tax advice. It reflects federal law as of August 2026, including the One Big Beautiful Bill Act (P.L. 119-21). Tax law is complex, individual circumstances vary, and Congress can change the law. Consult qualified legal and tax professionals about your specific situation before acting.