Estate Tax Exemption Sunset: What Austin Families Need to Know Before 2026

For Austin families with significant assets, 2025 and 2026 represent a critical planning window that will not come again. The federal estate and gift tax exemption — currently one of the most generous in modern history — is scheduled to be cut roughly in half at the end of 2025 under current law. If you have not reviewed your estate plan in the last two years, this single legislative change could cost your family hundreds of thousands of dollars in unnecessary federal estate tax.

This article explains exactly what's changing, who it affects, and what concrete steps Austin families should be taking right now to take advantage of the current exemption before it disappears.

A Quick History: How We Got Here

The federal estate tax has existed in various forms since 1916, but the exemption amount has swung wildly over the decades based on political priorities. In 2017, the Tax Cuts and Jobs Act (TCJA) nearly doubled the existing exemption, taking it from roughly $5.49 million per person to over $11 million per person, indexed for inflation each year.

By 2025, thanks to inflation adjustments, that exemption has grown to approximately $13.99 million per individual — meaning a married couple can currently shield close to $28 million from federal estate tax through proper planning. This has been an extraordinary opportunity for high-net-worth families, business owners, and real estate investors throughout Travis County and the broader Austin metro area.

But the TCJA built in a sunset provision. Unless Congress acts to extend or make permanent the higher exemption, the law reverts on January 1, 2026 to the pre-TCJA baseline, adjusted for inflation — estimated to land somewhere around $7 million per individual. For a married couple, that's a swing of roughly $14 million in newly taxable estate value, taxed at rates up to 40%.

Who Should Be Paying Attention

It's tempting to assume estate tax sunset planning only matters for the ultra-wealthy. In a city like Austin, where real estate values have appreciated dramatically over the past decade, that assumption can be dangerously wrong. Consider how quickly an estate can approach or exceed the new lower threshold:

• A family home in Tarrytown or Old West Austin purchased decades ago for a few hundred thousand dollars, now worth $2-4 million
• A successful small business with goodwill, equipment, and real estate combined
• Significant equity compensation (RSUs, stock options) from Austin's thriving tech sector employers
• Investment real estate portfolios built over a career
• Life insurance policies that, if improperly structured, are included in the taxable estate
• Retirement accounts, particularly for highly compensated individuals nearing retirement

When you add a primary residence, a vacation property, retirement savings, life insurance, and business interests together, many financially successful Austin families are far closer to the new $7 million threshold than they realize — especially once you account for continued appreciation between now and whenever the second spouse passes away.

Why "Use It or Lose It" Is Not Just a Sales Slogan

One of the most important and least understood concepts in estate tax planning is "use it or lose it." The federal gift tax and estate tax share a single unified exemption. Every dollar of exemption you use during your lifetime via gifting reduces the exemption available at death — but crucially, gifts made today lock in today's higher exemption amount, even if the exemption later decreases.

The IRS has issued clarifying regulations confirming that gifts made while the higher exemption is in effect will not be "clawed back" even after the exemption drops. This means that strategic gifting completed before the sunset deadline can permanently shelter assets at the higher exemption level — a benefit that disappears the moment the calendar turns and the lower exemption takes effect.

In practical terms: if you have the means to make significant gifts now — to children, to trusts for their benefit, or through other vehicles — you can lock in protection for assets that would otherwise become taxable at the new lower threshold.

Planning Strategies Austin Families Should Be Considering

1. Spousal Lifetime Access Trusts (SLATs)

A SLAT allows one spouse to make a substantial gift into an irrevocable trust for the benefit of the other spouse (and often children), using their exemption while the higher amount is available. The gifting spouse gives up direct ownership of the assets, but the trust can still make distributions to the beneficiary spouse during their lifetime — providing a layer of ongoing financial access that pure outright gifting does not.

2. Grantor Retained Annuity Trusts (GRATs)

For Austin business owners or those holding appreciating assets, a GRAT allows you to transfer future appreciation out of your taxable estate while retaining an annuity stream for a set number of years. If the asset outperforms a government-set interest rate, the excess growth passes to your beneficiaries gift-tax-free.

3. Irrevocable Life Insurance Trusts (ILITs)

Life insurance proceeds are often the single largest unplanned addition to a taxable estate. An ILIT removes life insurance from your estate by having the trust — rather than you personally — own the policy.

4. Family Limited Partnerships and Valuation Discounting

For families with business interests or real estate holdings, transferring interests into a Family Limited Partnership before gifting them to the next generation can create legitimate valuation discounts for lack of control and lack of marketability.

5. Direct Annual Exclusion Gifting

The simplest tool available is the annual gift tax exclusion, which allows you to give a set amount per recipient each year without using any of your lifetime exemption at all. A married couple with several children and grandchildren can move substantial wealth out of their estate every year through this mechanism alone.

What Happens If You Do Nothing

If your estate exceeds the new, lower exemption amount when the second spouse passes away, the excess is taxed at a flat 40% federal rate. The tragedy of estate tax exposure is that it is almost entirely avoidable with advance planning, yet almost entirely unavoidable once the triggering event — death — has occurred. There is no fixing this after the fact.

The Clock Is Actually Ticking

Estate planning attorneys are seeing a significant surge in sunset-related planning engagements as the deadline approaches. Complex trust structures take time to draft, review, and properly fund — typically a minimum of several weeks, often longer. Attorneys, appraisers, and financial advisors who specialize in this work are increasingly booked solid as the deadline approaches.

What This Means If Congress Acts

It's reasonable to ask: what if Congress extends the higher exemption before it sunsets? This is a legitimate possibility, but the planning strategies described above are not wasted even if Congress acts. Properly structured trusts continue to provide asset protection, control over distributions, and protection from future legislative changes regardless of what happens with the current exemption level.

A Note on State-Level Considerations

Texas does not impose a state-level estate or inheritance tax, which is a genuine advantage of being an Austin resident. However, Texas residents with property in other states may still face state-level estate tax exposure in that other jurisdiction.

Practical Next Steps

• Add up your home equity, retirement accounts, life insurance death benefit, investment accounts, and any business interests at fair market value
• If that total exceeds roughly $7 million for an individual or $14 million for a married couple, you should have a conversation with an estate planning attorney soon
• Even if you're below that threshold today, consider your growth trajectory — today's comfortable margin can close quickly
• Don't wait for certainty about future tax law — the cost of appropriate planning that turns out to be unnecessary is far lower than the cost of needed planning that never happened

Understanding Portability and the Deceased Spousal Unused Exclusion

One of the most valuable but underutilized tools in federal estate tax planning is "portability" — the ability for a surviving spouse to inherit and use any unused portion of their deceased spouse's federal estate tax exemption. This concept, formally known as the Deceased Spousal Unused Exclusion (DSUE), can effectively allow a married couple to combine their exemptions even without sophisticated trust planning, but only if the proper election is made on a timely filed federal estate tax return after the first spouse's death.

This is a critical point that catches many families off guard: portability is not automatic. If the first spouse to die has an estate below the filing threshold, executors often assume no estate tax return needs to be filed at all. But if you want to preserve that spouse's unused exemption for the surviving spouse's later use, a federal estate tax return (Form 706) must generally be filed within nine months of death (with a possible six-month extension), specifically electing portability — even when no tax is actually due.

For families relying primarily on portability rather than more complex trust structures, this means working with an attorney and accountant who understand the portability election process is essential, particularly in a year when the exemption amount itself is about to change substantially. Missing this election due to a lack of awareness can permanently waste millions of dollars in exemption that could have been preserved for the surviving spouse's later benefit.

The Generation-Skipping Transfer Tax Layer

For families considering significant gifts directly to grandchildren, or trusts designed to benefit multiple future generations, there's an additional tax layer to understand: the generation-skipping transfer (GST) tax. This separate tax, also subject to its own exemption amount that is scheduled to change alongside the broader estate and gift tax exemption, applies specifically to transfers that "skip" a generation — for example, a gift from a grandparent directly to a grandchild, bypassing the grandchild's parent.

The GST exemption operates independently from the basic estate and gift tax exemption, meaning sophisticated multigenerational planning often requires careful allocation of both exemptions to maximize the amount that can pass to grandchildren and future generations without incurring this additional tax layer. Trusts designed to benefit multiple generations — sometimes called dynasty trusts — are specifically structured to make full use of GST exemption while the higher amounts remain available.

Valuation Considerations in a Changing Exemption Environment

Many of the planning techniques discussed in this article, particularly those involving business interests, real estate, or other illiquid assets, depend heavily on accurate valuation. As exemption amounts change and more families rush to complete planning before the sunset deadline, the demand for qualified appraisers experienced in estate and gift tax valuation work has increased substantially.

Families considering significant gifting strategies involving hard-to-value assets should factor in adequate time not just for legal drafting, but for obtaining a defensible, professional valuation that can withstand IRS scrutiny if the gift is ever questioned. Rushing this step, or relying on informal valuations, creates meaningful risk that a completed gifting strategy could later be challenged and potentially unwound or penalized.

Income Tax Basis Considerations: The Other Side of the Equation

While much of the sunset planning conversation focuses on estate and gift tax avoidance, it's important not to overlook income tax basis considerations, which can sometimes work in the opposite direction. Assets that pass through your estate at death generally receive a "step-up" in income tax basis to their fair market value at the time of death — meaning your heirs can potentially sell inherited appreciated assets without owing capital gains tax on the appreciation that occurred during your lifetime.

Assets gifted during your lifetime, by contrast, generally retain your original "carryover" basis, meaning your heirs could face significant capital gains tax if they later sell the gifted asset, even though no estate or gift tax applied to the transfer itself. This creates a genuine planning tension: aggressive lifetime gifting to use exemption before the sunset deadline can sometimes increase your family's overall income tax burden, even while reducing or eliminating estate tax exposure.

The right balance between lifetime gifting and basis step-up planning depends heavily on your specific assets, their appreciation history, and your family's overall tax picture — another reason why this kind of planning benefits enormously from working with an attorney who coordinates closely with your tax preparer and financial advisors, rather than pursuing aggressive gifting strategies in isolation without considering the full tax picture.

Charitable Planning as a Complementary Strategy

For families who are charitably inclined, the exemption sunset also presents an opportunity to revisit charitable giving strategies that can simultaneously reduce taxable estate value and accomplish philanthropic goals. Charitable Remainder Trusts (CRTs) allow you to receive an income stream during your lifetime while ultimately benefiting a charity of your choice, removing the underlying asset from your taxable estate while providing you with both income tax deductions and ongoing financial benefit.

Charitable Lead Trusts work in the opposite direction, providing income to a charity for a set period before remaining assets pass to your family members, often at a significantly reduced gift tax cost compared to an outright gift of the same assets. For families with strong charitable intentions who are also navigating significant estate tax exposure, integrating charitable planning into the broader sunset planning conversation can produce outcomes that serve multiple goals simultaneously.

How Our Firm Approaches Sunset Planning

At Austin Probate Attorneys, we integrate federal tax analysis directly into every estate plan we build. When a client comes to us concerned about the exemption sunset, we begin with a comprehensive review of their current asset picture, project forward under both the current and anticipated future exemption levels, and identify the specific planning tools that make sense for their unique family structure and goals.

If you believe your family may be affected by the upcoming exemption changes, now is the time to have that conversation. The deadline does not move, and the planning required to take advantage of it does take time.

Frequently Asked Questions About the Exemption Sunset

Will the exemption definitely drop at the end of 2025?

Under current law, yes — the sunset is built directly into the existing statute, meaning it will happen automatically unless Congress passes new legislation to prevent it. While extension or permanence is politically possible, prudent planning treats the sunset as the expected outcome rather than betting on a legislative change that may not materialize in time.

Does this affect Texas residents differently than residents of other states?

The federal exemption sunset applies identically regardless of which state you live in, since it's a matter of federal tax law. However, Texas's lack of a state-level estate tax means Texas families are spared an additional layer of tax exposure that residents of certain other states must also navigate, making proper federal planning even more impactful here.

Is it too late to do anything if I haven't started planning yet?

It depends entirely on the complexity of the strategy you pursue and how much runway remains before the deadline. Simpler strategies, like updated will provisions or straightforward gifting, can often be implemented relatively quickly. More complex structures involving business valuations or sophisticated trust drafting need more lead time, which is exactly why earlier action provides more flexibility and better outcomes than waiting until the final weeks of the year.