A couple came to see me in March. They had built a revocable living trust in 2017 with a well-regarded firm that is no longer in practice. The trust included a formula-based credit-shelter provision designed to capture the full federal estate-tax exemption at the first spouse's death and leave the rest to the surviving spouse in a marital trust.
In 2017, the exemption was $5.49 million per person. By the time the trust was drafted, the Tax Cuts and Jobs Act had passed and the exemption had roughly doubled to $11.18 million. Today it is $13.99 million. On January 1, 2026, unless Congress acts, it is scheduled to drop back to approximately $7 million per person.
The formula in their trust reads: "at the death of the first spouse, allocate to the credit-shelter trust an amount equal to the maximum amount that can pass free of federal estate tax." That formula, in 2025, allocates up to $13.99 million to the credit-shelter trust. In 2026, it allocates only about $7 million — if both spouses die in the same year. If the first spouse dies in 2025 and the formula runs, the credit-shelter trust captures nearly $14M of exemption. If the first spouse dies in 2026, the allocation is cut roughly in half.
Their estate is $18 million. That timing difference is worth about $3 million in federal estate tax.
What the Cliff Actually Is
The 2017 Tax Cuts and Jobs Act doubled the federal estate and gift tax exemption and included a sunset clause: on January 1, 2026, the exemption reverts to its pre-TCJA level, indexed for inflation. The projected 2026 exemption is around $7 million per person ($14 million per couple), roughly half of the 2025 exemption.
Congress may or may not extend the higher exemption. As of the date of this article, there is no enacted legislation either preserving the TCJA level or replacing it. Planning conservatively means planning as though the cliff happens.
Who Is Exposed
Families with total estates between roughly $7 million and $28 million are the most directly exposed. Below $7 million per person (about $14 million for a married couple), estate tax is unlikely regardless of the cliff. Above $28 million per couple, the estate tax exposure has always been substantial and planning decisions have long factored in the top federal rate of 40%.
The in-between families are the ones whose estate plans may need the most urgent attention. They are the families who built plans assuming they would never pay federal estate tax, and whose plans may stop delivering on that assumption.
The Use-It-Or-Lose-It Opportunity in 2025
The IRS issued regulations in 2019 confirming that gifts made using the higher exemption before 2026 will not be subject to "clawback" — that is, if you gift $13.99 million in 2025 and the exemption drops to $7 million in 2026, the earlier gift is respected. You cannot use the same exemption twice, but you can effectively lock in the higher 2025 amount by making large lifetime gifts while the higher exemption is available.
For married couples, the Spousal Lifetime Access Trust (SLAT) is frequently the tool of choice. Each spouse creates a SLAT for the benefit of the other, funding it with assets up to the higher exemption. The spouses retain indirect access through the trust distributions to each other — though the trusts must not be reciprocal in a way that triggers the reciprocal-trust doctrine, which is where a careful drafter earns their keep.
What to Audit Between Now and January 1, 2026
If your estate is between $7 million and $28 million, the items I would audit immediately:
- Any formula-based allocation in an existing will or trust — does the formula still do what you intended at the new exemption level?
- Any bypass trust, credit-shelter trust, or QTIP election strategy — does it still produce the intended tax outcome?
- Existing life insurance trusts (ILITs) and the exemption they consume
- Lifetime gifting strategy and remaining 2025 exemption availability
- Business-ownership and real-estate appraisals — valuation freezes, recapitalizations, and GRAT strategies all depend on current valuations
- Step-up-in-basis coordination with estate-tax planning — avoiding lifetime gifts of low-basis assets that would better step up at death
Texas Has No State Estate Tax — But That Does Not Help Here
Texas imposes no state-level estate tax, which is a real benefit for Texas residents. The federal tax, however, applies regardless of state of residence and is the focus of the cliff. Texas community-property rules do affect basis planning and marital-deduction strategies in useful ways, but they do not shield Texas families from the federal exemption reduction.
The Calendar Matters
If you are planning to use 2025 exemption, meaningful planning takes time — appraisals, trust drafting, asset-transfer mechanics, and compliance review for SLAT non-reciprocal language all have to be in place before December 31, 2025. Families that come in during the first quarter of 2025 can do this work at a measured pace. Families that come in during the fourth quarter will be doing it in a hurry, behind every other tax-planning attorney in Texas.
We are having this conversation with every client whose estate is in the zone. If you think yours may be, the right time to have the conversation is earlier rather than later.
Carla Alston holds a Master of Laws in Taxation from New York University School of Law. She leads tax-smart estate planning at WG Law. Learn more or schedule a consultation.