2026 Estate Tax Exemption Sunset: Why California Families Must Act This Year

The Countdown Has Begun

On December 31, 2025, the Tax Cuts and Jobs Act (TCJA) of 2017 sunsets. Without Congressional action, the federal estate and gift tax exemption reverts to pre-TCJA levels—adjusted for inflation, but still roughly half of current levels.

Current exemption (2025): $13.99 million per person ($27.98 million per married couple)

Projected exemption (2026): $7 million per person ($14 million per married couple)

As a California estate planning attorney who serves families throughout Los Angeles and Santa Barbara Counties, I've been preparing clients for this deadline since 2023. The reality is now urgent: you have less than 11 months to implement strategies that could save your family millions in estate taxes.

Understanding the TCJA Sunset

What the TCJA Changed

The Tax Cuts and Jobs Act of 2017 temporarily doubled the estate and gift tax exemption:

Year	Exemption (Individual)	Exemption (Married Couple)
2017 (Pre-TCJA)	$5.49 million	$10.98 million
2018 (TCJA enacted)	$11.18 million	$22.36 million
2024	$13.61 million	$27.22 million
2025	$13.99 million	$27.98 million
2026 (Sunset)	~$7 million	~$14 million

Why Is This Happening?

To pass through the Senate's reconciliation process in 2017, the TCJA included a "sunset" provision—the changes expire after 8 years unless Congress acts. This wasn't accidental; it was a political necessity to get the bill passed.

Will Congress Extend the Higher Exemption?

The honest answer: nobody knows.

Political realities:

• Extension requires bipartisan support or budget reconciliation
• The political landscape may change after 2024 elections
• Revenue considerations favor letting exemption drop
• High-net-worth planning should assume sunset will occur

Prudent planning: Act as if the exemption will drop. If Congress extends it, you've lost nothing. If it doesn't, you've protected your family.

Who Is Affected by the 2026 Sunset?

Newly Affected Estates

Families with estates between ~$7 million and ~$14 million per person who currently face no estate tax exposure will suddenly become subject to the 40% estate tax.

In California, this captures many families who don't consider themselves "wealthy" but have:

Already-Affected Estates

Families with estates exceeding the current exemption should evaluate whether to accelerate wealth transfers to use the higher exemption before it disappears.

Example: A $30 million estate currently faces ~$6.4 million in estate tax [($30M - $27.98M married exemption) × 40%]. Under 2026 law, the tax increases to ~$6.4 million [($30M - ~$14M) × 40%] = approximately $6.4 million in additional exposure.

Planning Strategies Before the Sunset

Strategy 1: Lifetime Gifting to Use the Exemption

The most straightforward approach: make large gifts now to use the $13.99 million exemption before it drops.

How It Works:

• You can gift up to $13.99 million (2025) without paying gift tax
• Gifts use your "unified credit" (same exemption for gifts and estate)
• Once gifted, assets (and their future appreciation) are out of your estate
• The IRS has confirmed: no clawback on gifts made under the higher exemption

Example Strategy:

• Married couple with $20 million estate
• In 2025, each spouse gifts $6 million to irrevocable trust for children = $12 million total
• Remaining estate: $8 million
• Under 2026 exemption (~$14 million married), no estate tax owed
• $12 million removed from estate permanently
• Future appreciation on gifted assets also avoided

Strategy 2: Spousal Lifetime Access Trusts (SLATs)

For married couples hesitant to give away assets permanently, a SLAT provides a middle ground:

How SLATs Work:

• One spouse creates an irrevocable trust for the other spouse and/or descendants
• The non-donor spouse can receive distributions from the trust
• Assets are out of the donor spouse's estate
• The couple maintains indirect access to the funds

SLAT Considerations:

• Each spouse can create a SLAT for the other (but avoid "reciprocal trust" doctrine)
• Trust must be carefully drafted to avoid estate inclusion
• If spouses divorce, access may be lost
• Trust assets get donor spouse's stepped-up basis at death (not double step-up)

Strategy 3: Grantor Retained Annuity Trusts (GRATs)

A GRAT allows you to transfer appreciation while minimizing gift tax:

How GRATs Work:

• You transfer assets to an irrevocable trust
• You receive an annuity payment for a set term (e.g., 2-10 years)
• At the end, remaining assets pass to beneficiaries
• If structured correctly, gift tax is minimal ("zeroed-out" GRAT)

Best For:

• Assets expected to appreciate significantly
• Business owners anticipating liquidity events
• Stock portfolios with growth potential

Risk: If you die during the GRAT term, assets are included in your estate.

Strategy 4: Irrevocable Life Insurance Trusts (ILITs)

Life insurance death benefits are included in your estate if you own the policy. An ILIT removes this exposure:

How ILITs Work:

• Create irrevocable trust to own life insurance policy
• Trust (not you) pays premiums
• Death benefit passes to beneficiaries outside your estate
• Proceeds can be used to pay estate taxes on other assets

Example:

• $3 million life insurance policy
• Currently in estate: adds $3 million to estate value
• In ILIT: $3 million passes to heirs estate-tax-free
• Savings: $1.2 million in estate tax (40% × $3M)

See our comprehensive ILIT guide for detailed information.

Strategy 5: Family Limited Partnerships (FLPs) and LLCs

For families with significant assets, FLPs and LLCs can:

• Consolidate family assets under unified management
• Apply valuation discounts (lack of marketability, minority interest)
• Facilitate gradual wealth transfer through gifting of interests
• Maintain control while transferring value

Valuation Discounts: Gifting a 30% limited partnership interest in a $10 million FLP may only count as a $6.5 million gift (after 15-25% discounts), preserving more exemption.

Caution: FLPs require genuine business purpose and proper formalities. The IRS scrutinizes aggressive discount claims.

Strategy 6: Charitable Planning

For charitably inclined families, several strategies reduce estate tax while supporting causes you care about:

Charitable Remainder Trusts (CRTs):

• Transfer appreciated assets to trust
• Receive income stream for life or term of years
• Remainder passes to charity
• Immediate income tax deduction + estate tax reduction

Charitable Lead Trusts (CLTs):

• Charity receives income for set period
• Remainder passes to heirs at reduced gift/estate tax value
• Best in low interest rate environments

Donor Advised Funds:

• Immediate income tax deduction
• Assets grow tax-free
• Direct distributions to charities over time

California-Specific Considerations

No State Estate Tax (But Don't Celebrate Yet)

California has no state estate tax or inheritance tax. However:

• Federal estate tax still applies at 40%
• California income taxes may apply to inherited retirement accounts
• Property tax reassessment under Prop 19 can create significant ongoing costs

High Property Values = High Estate Values

California's real estate market means many "middle class" families have estates exceeding the 2026 threshold:

Area	Median Home Value	Family Estate Risk
Montecito	$6.2 million	High
Palo Alto	$3.8 million	High
Beverly Hills	$3.5 million	High
Manhattan Beach	$3.2 million	High
San Francisco	$1.4 million	Moderate
Glendale	$1.2 million	Moderate

A paid-off house plus retirement accounts and life insurance can easily push California families over the $7 million threshold.

Community Property Considerations

California's community property system affects estate planning:

• Each spouse owns half of community property
• Each spouse can gift/bequeath their half
• Proper characterization is essential for tax planning
• Separate property requires additional documentation

Action Steps for California Families

If Your Estate Is $7-14 Million (Per Person)

You're newly exposed. Priority actions:

1. Calculate your true estate value (including life insurance, retirement accounts, business interests)
2. Consider lifetime gifts to use the higher exemption
3. Review life insurance ownership (consider ILIT)
4. Establish portability if first spouse has died
5. Consult with estate planning attorney immediately

If Your Estate Exceeds $14 Million (Married)

You're already exposed and facing increased exposure. Priority actions:

1. Maximize gifting before December 31, 2025
2. Implement SLATs for married couples
3. Consider GRATs for appreciating assets
4. Evaluate FLP/LLC structures for family assets
5. Review existing trusts for optimization opportunities
6. Coordinate with financial advisors and CPAs

If Your Estate Is Under $7 Million

You're likely not affected by estate tax, but:

1. Still need basic estate planning (living trust, powers of attorney)
2. Monitor your estate growth (could exceed threshold later)
3. Consider Prop 19 planning for California property
4. Review beneficiary designations on retirement accounts

The Portability Election: Don't Miss This

If a spouse has died (even years ago), the surviving spouse may be able to claim the deceased spouse's unused exemption (DSUE) through a portability election:

How Portability Works

• First spouse dies with $5 million estate, $13.99 million exemption
• Unused exemption: $8.99 million
• Surviving spouse files Form 706 electing portability
• Surviving spouse now has: $13.99 million (own) + $8.99 million (DSUE) = $22.98 million

Critical Requirements

• Must file Form 706 within 9 months of death (extension to 15 months possible)
• Must elect portability on the return
• Applies only to most recent deceased spouse
• Late election possible in some cases (IRS Rev. Proc. 2022-32)

If You Missed the Deadline

The IRS has permitted late portability elections for estates not otherwise required to file. Consult with an attorney—it may not be too late if the first spouse died within the last several years.

Common Mistakes to Avoid

Mistake 1: Waiting Too Long

Complex estate planning strategies require:

• Detailed analysis of assets
• Legal document drafting and review
• Asset transfers and reregistration
• Coordination with financial institutions
• Gift tax return preparation

This process takes 3-6 months minimum. Starting in November 2025 is too late for most strategies.

Mistake 2: DIY Large Gifts

Gifting $5+ million without proper documentation can:

• Trigger unintended gift tax
• Fail to remove assets from estate
• Create family conflicts
• Miss valuation discount opportunities

Mistake 3: Forgetting State Tax Implications

While California has no estate tax, other states do:

• Oregon: $1 million exemption
• Massachusetts: $2 million exemption
• New York: $6.94 million exemption

If you own property in other states or may relocate, consider state estate tax exposure.

Mistake 4: Not Coordinating with Advisors

Estate tax planning affects:

• Income tax (basis, retirement accounts)
• Gift tax (filing requirements)
• Investment strategy (trust vs. individual)
• Cash flow (if making large gifts)

Your attorney, CPA, and financial advisor must work together.

Mistake 5: All-or-Nothing Thinking

You don't have to gift your entire exemption. Options include:

• Gift a portion now, reserve the rest
• Use annual exclusion gifts ($19,000/person) alongside lifetime gifts
• Combine strategies (SLAT + ILIT + annual gifts)
• Phase gifts over 2025 and early 2026

Frequently Asked Questions

What happens to the estate tax exemption in 2026?

On January 1, 2026, the federal estate and gift tax exemption is scheduled to drop from $13.99 million per person to approximately $7 million per person (the exact amount will be announced by the IRS, indexed for inflation from the 2017 base of $5 million). This is because the Tax Cuts and Jobs Act of 2017 provisions expire on December 31, 2025, reverting the exemption to pre-TCJA levels adjusted for inflation. The estate tax rate remains at 40% for amounts exceeding the exemption. Without Congressional action to extend the higher exemption, this sunset will occur automatically.

Should I make large gifts before 2026 to use the higher exemption?

For families with estates exceeding $7 million per person ($14 million per couple), making gifts before the exemption drops can permanently remove assets from the taxable estate. The IRS has confirmed in final regulations that there will be no "clawback"—gifts made under the higher exemption won't be penalized when the exemption drops. However, large gifts require careful planning: you must consider whether you can afford to give away assets, how gifts affect basis for beneficiaries, and whether trusts are needed for asset protection or control. This is not a DIY project—work with qualified professionals.

Does California have its own estate tax?

No. California does not have a state estate tax or inheritance tax. However, California residents are still subject to federal estate tax, which applies to estates exceeding the exemption amount at a rate of 40%. Additionally, California has high income taxes that may apply to distributions from inherited retirement accounts, and Proposition 19 may trigger property tax reassessment when property passes to heirs. While California's lack of estate tax is favorable, federal estate tax and California income/property tax considerations still require planning.

What is the annual gift tax exclusion for 2026?

The annual gift tax exclusion—separate from the lifetime exemption—is projected to be $19,000 per recipient for 2026 (subject to official IRS announcement). This allows you to give $19,000 per year to any number of people without using any of your lifetime exemption or filing a gift tax return. Married couples can give $38,000 per recipient ($19,000 each). These annual exclusion gifts are in addition to the lifetime exemption and should be part of every high-net-worth family's ongoing wealth transfer strategy.

Can married couples combine their estate tax exemptions?

Yes, through a mechanism called "portability." When the first spouse dies, the surviving spouse can elect to use the deceased spouse's unused exemption (called the Deceased Spousal Unused Exclusion or DSUE), effectively doubling the available exemption. However, this requires filing IRS Form 706 (estate tax return) within 9 months of death (with a possible 6-month extension), even if no estate tax is owed. Without this election, the first spouse's unused exemption is lost forever. If your spouse has passed away and you haven't filed for portability, consult with an attorney—late elections may be possible.

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The Clock Is Ticking

The 2026 estate tax exemption sunset represents the most significant estate tax change in nearly a decade. For California families with estates between $7 million and $28 million, the next 11 months offer a once-in-a-generation opportunity to transfer wealth tax-free.

We help California families with:

• Estate value analysis and tax exposure calculation
• Lifetime gifting strategies and gift tax returns
• Spousal Lifetime Access Trust (SLAT) creation
• Irrevocable Life Insurance Trust (ILIT) establishment
• Family Limited Partnership and LLC structures
• Portability elections for surviving spouses
• Coordination with your CPA and financial advisors

Don't let 2026 catch your family unprepared. Call (818) 291-6217 or visit our contact page to schedule a consultation.

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About the Author

Rozsa Gyene (State Bar No. 208356) is a California estate planning and trust administration attorney serving families throughout Los Angeles and Santa Barbara Counties. With extensive experience in high-net-worth estate planning and wealth transfer strategies, Rozsa helps California families navigate complex tax planning while protecting their legacies.

Office Location: 450 N Brand Blvd, Suite 600, Glendale, CA 91203

Phone: (818) 291-6217

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Disclaimer: This article provides general information about federal estate tax law and the 2026 exemption sunset. It should not be construed as legal or tax advice. Tax laws are complex and subject to change, including potential Congressional action before the sunset date. This article reflects information current as of February 2026. Consult with qualified legal and tax professionals about your specific circumstances before implementing any estate tax planning strategies.

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