For the better part of eight years, a single date loomed over nearly every estate planning conversation I had with high-net-worth clients: January 1, 2026. That was the day the Tax Cuts and Jobs Act’s elevated exemptions were set to expire, cutting the federal estate and gift tax exclusion roughly in half overnight. Families scrambled. Trusts were funded under pressure. Large lifetime gifts were made (some strategically brilliant, some rushed, some not quite right) all in an effort to lock in exemption before it vanished.
That date has now come and gone, and the outcome was the opposite of what we feared.
With the signing of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, Congress didn’t just extend the TCJA exemptions – it made them permanent and raised them. The defensive posture that shaped nearly a decade of wealth transfer planning has fundamentally changed. If your estate plan was built around the sunset that never came, it’s time to have a different kind of conversation: not about protecting what you’ve already given away, but about optimizing what you still hold.
What Actually Changed on January 1, 2026
The numbers tell the story clearly. Under the TCJA, the federal estate, gift, and generation-skipping transfer (GST) tax exemption sat at $13.99 million per individual in 2025. Without Congressional action, that figure was projected to fall to approximately $7 million – a clawback that would have exposed tens of millions of dollars in family wealth to the 40% federal transfer tax.
Instead, the OBBBA increased the federal estate, gift, and generation-skipping exemption to a new $15 million per person as of January 1, 2026, meaning married couples can now pass $30 million tax-free. And critically, unlike the increase under the TCJA, the increase under the OBBBA is not subject to a sunset. Beginning in 2027, the $15 million figure will be indexed for annual inflation, with 2025 as the base year.
For clients who made large defensive gifts between 2017 and 2025, there is also welcome confirmation on the clawback question. Per existing IRS guidance, any use of exemption that exceeds the post-2025 amount will not be clawed back into the estate. What you gifted is protected. The planning you did was not wasted, but it may now need to be reframed.
The 40% marginal tax rate on transfers above the exemption is unchanged. So the stakes are still real for ultra-high-net-worth families; the threshold at which those stakes kick in is simply much higher than it was ever expected to be.
New York Is Not Following the Federal Lead And That Gap Is Dangerous
Here is where I always ask my New York clients to slow down and pay careful attention. Federal headlines can be misleading, because New York operates its own estate tax system – and it is far less generous.
The New York estate tax exemption for 2026 is $7,350,000 per person, and New York’s rules do not offer portability between spouses. That last point alone, no portability, means married couples cannot simply rely on the surviving spouse to pick up unused exemption at the first death. Without a properly structured trust, the first spouse’s New York exemption can be lost entirely.
More dangerous still is what practitioners call the “cliff effect.” When a New York taxable estate exceeds approximately 105% of the exemption amount (which in 2026 equals $7,717,500), the state withdraws the entire exemption. The full value of the estate, not just the excess above the threshold, becomes subject to New York estate tax.
To put that in plain English: a New York estate worth $7.5 million might owe no estate tax. An estate worth $7.8 million could owe estate tax on the entire $7.8 million. The cliff is not gradual. It is a step function, and falling off it can cost a family hundreds of thousands of dollars.
New York also imposes a three-year “look-back” rule: gifts made within three years of death are added back into the estate for New York estate tax calculations. This means that even gifts that are complete for federal purposes, and protected from federal clawback, can still affect your New York exposure if made too close to death.
The spread between the federal and New York state estate tax exclusion amounts now stands at $7,650,000 per individual. For families with estates in that band, above the New York threshold but well below the federal, New York, not Washington, is the primary planning target. Sophisticated estate planning in this environment requires someone who understands both systems simultaneously, not just one.
The Strategic Pivot: From Defense to Optimization
If the prior era of planning was about moving assets out of your estate before the exemption shrank, the current era is about something more nuanced: making sure the assets already outside your estate are positioned as efficiently as possible, and optimizing the tax treatment of everything that remains.
Basis: The Problem Nobody Talked About During the Rush
When clients made large gifts between 2017 and 2025, often transferring appreciated stock, real estate, or business interests into irrevocable trusts, the focus was almost entirely on the estate tax side of the ledger. The gift removed future appreciation from the taxable estate. That was the goal, and it was accomplished.
But gifted assets carry the donor’s carryover basis. Unlike assets held until death, which receive a stepped-up basis to fair market value under IRC Section 1014, assets gifted during life are inherited by the trust (and ultimately the beneficiaries) at the original cost basis. For a family that contributed stock purchased decades ago at a fraction of its current value, or a business interest with minimal adjusted basis, this creates a significant embedded capital gains liability.
Now that the urgency of exemption preservation has passed, there is time to think carefully about this trade-off. The question is not simply “did we remove enough from the estate?” It’s “which assets are best positioned to be transferred, held, or returned – considering both estate tax and income tax consequences?”
Swap Powers: The Underused Tool in Existing IDGTs
Many of the trusts established during the 2017–2025 defensive planning era were structured as Intentionally Defective Grantor Trusts (IDGTs). One of the defining features of an IDGT, the provision that makes it “defective” for income tax purposes, is often the swap power, also called a power of substitution.
A swap power generally allows the grantor to transfer personally owned assets to the trust in exchange for trust assets of equivalent value. This swap could encompass assets for assets, or cash for assets, and for income tax purposes the transaction is ignored since the trust and personal assets are both deemed held by the grantor.
In practice, this creates a remarkable planning opportunity right now. If an IDGT is holding a highly appreciated, low-basis asset, the grantor can swap that asset back, exchanging it for cash or other assets of equivalent fair market value. The appreciated asset returns to the grantor’s estate, where it will receive a stepped-up basis at death. The trust receives the substituted asset. No taxable gain is recognized on the exchange. The estate tax clock resets on the swapped-in asset.
This is not a loophole – it’s an expressly permitted feature of how IDGTs work under the grantor trust rules of IRC Sections 671–677. But it requires both legal authority (the swap power must be in the trust document) and careful execution. The values must be equivalent. The trustee must not have a conflict. Documentation matters.
For clients who funded IDGTs with low-basis appreciated assets under time pressure between 2022 and 2025, a swap power review should be near the top of the planning agenda.
Graegin Loans: Liquidity Strategy for Illiquid Estates
Not every client who faces potential estate tax, particularly at the New York level, holds assets that are easily liquidated. Closely held business interests, investment real estate, and concentrated partnership positions are common in the portfolios of the families we work with. When an estate is heavily weighted toward illiquid assets, paying the tax bill without a forced sale can be genuinely difficult.
This is where Graegin loans deserve renewed attention. Named after a 1988 Tax Court case, a Graegin loan is a loan to the estate (typically from a related entity like a family limited partnership, an ILIT, or a family business) structured specifically to finance the payment of estate taxes and administration expenses. The primary advantage is that all interest due over the life of the loan can be immediately deducted from estate tax liability on a dollar-for-dollar basis, effectively lowering the estate’s overall tax burden.
A Graegin loan can be obtained from a bank, other financial institution, related family business, or irrevocable life insurance trust, and there are no requirements for the estate to hold a qualifying closely-held business. The key structural requirements are that the loan must be a bona fide debt, the interest must be readily ascertainable over the life of the loan, and, critically, the loan must prohibit prepayment. That last point requires some trust on the part of families with good liquidity elsewhere, but for the right estate, the upfront interest deduction can meaningfully reduce the net tax cost.
It’s worth noting that IRS proposed regulations under IRC Section 2053 have signaled increased scrutiny of certain Graegin loan arrangements, particularly those involving related-party lenders. The structure must be commercially reasonable and properly documented. This is precisely the kind of transaction that benefits from integrated legal and tax counsel – someone who can both draft the underlying documents and evaluate the tax consequences simultaneously.
What Clients Who Made Defensive Gifts Should Do Now
If you spent 2022–2025 making large gifts, funding IDGTs, establishing SLATs, or otherwise deploying your lifetime exemption to beat the sunset that never arrived, here is a practical framework for what to review:
- Audit your existing trust inventory. Do your irrevocable trusts contain swap powers? Are those powers still operative? Has there been any inadvertent act that might have compromised the grantor trust status of an IDGT? These are document-level questions that matter enormously for basis planning.
- Map the basis profile of every trust. Work with your advisors to identify which assets held in trust carry embedded gain and which do not. Assets that have appreciated substantially since being gifted in, say, 2022 may be candidates for a strategic swap – returning them to the estate in exchange for cash, allowing for a basis step-up at death while still maintaining a reduced overall estate.
- Revisit credit shelter trust design for New York. Many existing plans structured the credit shelter trust (also called a bypass trust or A/B trust) around older, lower federal exemption levels. With the federal exemption now at $15 million and no portability at the New York level, trusts should be specifically structured to capture the state exemption, even when federal estate tax is not a concern for a given estate.
- Consider whether your insurance strategy still fits. Life insurance inside an ILIT is often the right tool for liquidity – particularly for business-owner clients with illiquid estates. But with a permanent $15 million federal exemption, the sizing of existing ILIT policies should be revisited. Are you paying premiums on coverage you no longer need? Or, conversely, is a Graegin-loan strategy better suited to your current asset mix than insurance? These questions require the kind of tax planning analysis that integrates estate structure with overall financial strategy.
- Don’t ignore business succession. For clients with closely held business interests, which remain among the most complex assets to plan around from both a valuation and liquidity standpoint, the permanent exemption changes the calculus on timing. The urgency to transfer business interests under the TCJA sunset pressure has eased, but the long-term advantages of moving appreciating business equity out of the estate through installment sales to IDGTs, GRATs, or business succession planning structures are as compelling as ever.
Why Dual Credentials Matter More Than Ever
The planning opportunities described in this post sit at a precise intersection between tax law, trust administration, income tax consequences, and financial modeling. Swap powers require knowledge of the grantor trust rules and careful drafting. Graegin loans require both the legal documents and the tax deduction analysis. Basis optimization requires understanding IRC Section 1014, gift tax rules, and trust accounting simultaneously.
This is not work that divides cleanly between a tax advisor and an estate planning attorney. The decisions in this environment are integrated – they require someone who thinks in both languages at once, because a choice that looks right from the estate tax perspective may be costly from an income tax perspective, and vice versa.
That integrated view is what we bring to every engagement at the Law Offices of Lawrence Israeloff, PLLC.
The Bottom Line
The sunset your plan was built around never arrived. That is genuinely good news. But it does not mean your existing plan is optimal – it means the criteria for optimization have changed. The conversation has shifted from “how do I protect my exemption?” to “how do I make the most of the stability I now have?”
For ultra-high-net-worth families in New York, the New York estate tax cliff remains a serious and underappreciated risk. For clients holding appreciated assets in irrevocable trusts, basis planning through swap powers may now be the highest-leverage move available. And for families with illiquid estates facing potential state or federal tax, Graegin loan structures deserve a careful look alongside insurance alternatives.
The strategies available in 2026 are sophisticated, and they reward careful analysis over reactive action.
If you made significant gifts between 2017 and 2025, or if your estate plan was structured around the now-permanent exemption changes, it’s worth sitting down to review whether the strategy still fits your current picture. As both an attorney and a CPA, Lawrence Israeloff is uniquely positioned to work through the estate, trust, and income tax dimensions of your plan at once without handoffs between disciplines. Reach out here to schedule a conversation about what the new landscape means for your family.
