When a Manhattan family with two commercial properties and an $8 million brokerage account sits down to review their estate, the conversation often begins with a false sense of security. They know the federal estate tax exemption sits at $13.61 million per person. They assume their $20 million estate is entirely safe from the IRS. That assumption expires on December 31, 2025.
The Tax Cuts and Jobs Act of 2017 temporarily doubled the federal estate and gift tax exemption. Unless Congress acts—and we never rely on legislative miracles when planning a family’s legacy—that exemption will sunset at the end of 2025. It reverts to its pre-2018 level, adjusted for inflation, landing near $7 million per individual. For a married couple, the protective shield drops from roughly $27 million to $14 million. The wealth exposed above that new threshold faces a 40 percent tax rate.
Exposure.
At Morgan Legal Group, P.C., we view estate planning as the deliberate stewardship of generational wealth. A sudden, multi-million-dollar tax liability is the antithesis of deliberate stewardship. Preparing for the 2026 reduction requires immediate, structural action.
The “Use It or Lose It” Reality
Clients often mistakenly believe they can use their base $7 million exemption now and save the extra bonus exemption for later. The IRS makes it explicitly clear the math works in reverse. The exemption is a use-it-or-lose-it proposition.
To capture the benefit of the current elevated exemption, you must gift assets exceeding the base $7 million. If you gift $5 million today, and the exemption drops to $7 million in 2026, you only have $2 million of exemption remaining. You captured none of the bonus. Locking in the temporary increase requires moving significant capital out of your taxable estate before the clock runs out.
Fortunately, IRS regulations confirm there will be no clawback. If you use your full exemption in 2025, and die in 2027 when the exemption is only $7 million, the IRS will not retroactively penalize your estate for gifts made under the old rules. The window is fully open, but it closes fast.
Strategic Custodianship: The SLAT
We do not simply hand millions of dollars to the next generation unprotected. Prudent planning demands control, asset protection, and flexibility. One primary vehicle we use to capture the expiring exemption is the Spousal Lifetime Access Trust (SLAT).
A SLAT allows one spouse to transfer assets into an irrevocable trust for the benefit of the other spouse. This accomplishes two vital goals. First, it completely removes the transferred assets—and all future appreciation on those assets—from the grantor’s taxable estate, successfully utilizing the high exemption before it sunsets. Second, because the other spouse is a beneficiary, the family retains indirect access to the trust funds if a financial contingency arises.
For couples with significant assets, we often structure reciprocal SLATs—where each spouse creates a trust for the other. However, we must draft these with exacting precision to avoid the IRS reciprocal trust doctrine, which can undo the entire arrangement if the trusts are deemed too identical. We vary the terms, the trustees, and the assets to ensure federal auditors recognize the separation.
The New York Tax Multiplier
Federal exposure is only half the equation. New York has its own estate tax, operating under a notoriously punitive structure. Unlike the federal system, which only taxes wealth above the exemption threshold, New York employs an estate tax cliff. If your estate exceeds the New York exemption amount—currently $6.94 million—by more than five percent, the state taxes the entire estate from dollar one.
If the federal exemption drops in 2026, families who previously thought they only had a New York tax problem will suddenly take a hit from both sides. The combined marginal tax rate between New York and the IRS can easily strip half the value of the exposed assets.
This dual taxation creates severe liquidity issues, bringing us to the mechanics of how these taxes are actually paid. Under EPTL §2-1.8, unless your will or trust contains a highly specific tax apportionment clause, Surrogate’s Court requires estate taxes to be equitably apportioned among the beneficiaries. If a father leaves a Brooklyn apartment building to his daughter and the liquid residuary estate to his son, the statute dictates that the daughter must pay her proportional share of the estate tax.
If a massive, unexpected federal tax bill triggers because the family failed to plan for the 2025 sunset, the daughter may be forced to take out a high-interest commercial mortgage on the building—or sell it entirely—just to satisfy the tax authorities. Deliberate legacy planning prevents this forced liquidation.
The Danger of Delay
As we move deeper into the year, the logistical runway for executing these transfers grows shorter. Funding a SLAT or a Grantor Retained Annuity Trust (GRAT) requires more than simply signing a document. It demands formal business valuations, real estate appraisals, and the retitling of assets.
Appraisers and valuation experts are already experiencing a surge in demand. By the middle of 2025, finding a qualified appraiser with the bandwidth to complete a complex business valuation before the December 31 deadline will be exceedingly difficult. Waiting until the final quarter of 2025 to address this sunset is a profound risk.
Protecting your life’s work requires proactive, intentional structuring. The rules are changing, but the tools to protect your family remain available for a limited time. I strongly recommend requesting a 2025 tax exposure audit of your current estate plan to determine exactly how the impending sunset will impact your family’s inheritance.
