Understanding the TCJA & Estate Planning

What Is the TCJA?

The Tax Cuts and Jobs Act (TCJA), formally known as Public Law 115-97, was signed into law on December 22, 2017. It represented the most comprehensive overhaul of the U.S. tax code in more than three decades, affecting individual income taxes, corporate tax rates, international taxation, and — critically for our purposes — estate, gift, and generation-skipping transfer (GST) taxes.

While much of the public discussion focused on income tax brackets and the corporate rate cut (from 35% to 21%), the TCJA's impact on estate planning was arguably even more profound. For families with significant assets, the law created a historic, time-limited window to transfer wealth to future generations with minimal or zero federal transfer tax.

Understanding the TCJA is foundational to every trust strategy covered in the Trust Wizard Knowledge Base. Whether you're considering a SLAT, ILIT, Dynasty Trust, or GRAT, the TCJA's provisions — and its imminent sunset — are the backdrop against which every planning decision should be evaluated.

The Estate & Gift Tax Exemption

The TCJA's headline estate planning provision was the near-doubling of the unified estate and gift tax exemption. Prior to the TCJA, the exemption was approximately $5.49 million per individual (2017, indexed for inflation). The TCJA effectively doubled the base amount to $10 million (in 2011 dollars), indexed for inflation.

As a result of annual inflation adjustments under IRC § 2010(c)(3), the exemption has grown steadily:

The unified nature of this exemption means it applies to both lifetime gifts and transfers at death. Every dollar of lifetime gifts that exceed the annual exclusion ($18,000 per recipient in 2024, $19,000 in 2025) reduces the remaining estate tax exemption dollar-for-dollar. The top federal estate and gift tax rate remains 40% on amounts exceeding the exemption.

The 2025 Sunset Provision

The TCJA's estate tax provisions are temporary. Under the law's sunset clause (TCJA § 11061), the doubled exemption is only effective for tax years 2018 through 2025. On January 1, 2026, the exemption reverts to the pre-TCJA base amount of $5 million (indexed for inflation since 2011), which is projected to be approximately $7 million per individual.

This sunset was a deliberate design feature. The TCJA was passed through the budget reconciliation process under the Byrd Rule, which required that the law not increase the federal deficit beyond a 10-year budget window. By sunsetting many of its provisions, the law's authors could project a smaller long-term revenue impact.

What Happens at Sunset

When the exemption drops, the practical consequences are significant:

• Estates between ~$7M and ~$14M (individual) that were previously fully exempt will now face estate taxes at up to 40%.
• Married couples with combined estates between ~$14M and ~$28M lose their full shelter and face potential tax bills in the millions.
• Families who have not yet utilized the enhanced exemption through lifetime gifting lose that opportunity permanently — the "use it or lose it" principle.
• Portability of unused exemption (DSUE amounts) will be based on the lower exemption for deaths occurring after 2025.

The Anti-Clawback Rule

One of the most important (and reassuring) pieces of guidance related to the sunset is the Treasury Department's anti-clawback regulation, finalized in Treasury Regulation § 20.2010-1(c) (published November 26, 2019).

The concern was straightforward: if a taxpayer uses $12 million of exemption to make gifts in 2024, and the exemption drops to $7 million in 2026, will the IRS attempt to "claw back" and tax the $5 million difference when the taxpayer dies?

The answer is no. The anti-clawback rule provides that if a taxpayer makes gifts during a period when the exemption is higher, and the exemption later decreases, the estate tax calculation will use the higher exemption amount that was in effect at the time of the gift. This means:

"The basic exclusion amount … is the greater of (1) the [current] basic exclusion amount … or (2) the basic exclusion amount … applicable at the time of the [prior] gifts." — Treas. Reg. § 20.2010-1(c)(2)

This regulation provides critical certainty for families making large gifts before the sunset. Gifts made under the enhanced exemption are permanently protected, even if the exemption drops afterward.

Generation-Skipping Transfer (GST) Tax Exemption

The TCJA also doubled the Generation-Skipping Transfer (GST) tax exemption, aligning it with the estate and gift tax exemption at $13.99 million per individual in 2025. The GST tax applies to transfers that skip a generation — for example, a grandparent transferring assets directly to a grandchild, bypassing the parents' generation.

Without the GST exemption, such transfers would be taxed at a flat 40% rate on top of any applicable estate or gift tax — potentially resulting in a combined effective tax rate exceeding 60%. The doubled GST exemption is especially significant for Dynasty Trusts, which are designed to transfer wealth across multiple generations while minimizing transfer taxes at each generational level.

Like the estate tax exemption, the GST exemption sunsets after 2025 and will revert to approximately $7 million per individual. Families utilizing Dynasty Trusts or similar multi-generational vehicles should allocate GST exemption to trust transfers before the sunset.

Income Tax & Trust Compressed Rate Brackets

While the TCJA is primarily discussed in the estate planning context for its exemption increase, it also modified income tax rates — including the highly compressed tax brackets that apply to trusts and estates.

Trusts and estates reach the top marginal federal income tax rate (37%) at just $15,200 of taxable income (2025). By contrast, individual taxpayers don't reach the 37% bracket until over $626,350 of taxable income. This means that trusts accumulating income face the highest tax rates very quickly.

This has several practical implications for trust planning:

• Grantor trusts (where the grantor pays income taxes on trust income) avoid these compressed brackets entirely. The grantor reports trust income on their personal return at individual rates. This is one reason why SLATs, ILITs, and GRATs are often structured as grantor trusts.
• Non-grantor trusts that accumulate income face the highest federal rate at very low thresholds, plus the 3.8% Net Investment Income Tax (NIIT) on undistributed net investment income.
• Trust distributions carrying out distributable net income (DNI) shift the tax burden to beneficiaries at their individual rates — often a significantly lower effective rate than the trust would pay.

Step-Up in Basis Considerations

The TCJA did not change the step-up in basis rule under IRC § 1014, which provides that the income tax basis of assets included in a decedent's gross estate is "stepped up" (or down) to fair market value at the date of death. This rule is a cornerstone of estate planning because it eliminates unrealized capital gains on inherited assets.

However, there is an important tension between the step-up in basis and irrevocable trust planning:

• Assets transferred to irrevocable trusts during life generally do not receive a step-up in basis at the grantor's death (because they are not included in the gross estate). The trust takes the grantor's carryover basis.
• Assets retained in the taxable estate receive a full step-up, but they are subject to estate tax if they exceed the available exemption.
• This creates a planning trade-off: using the enhanced exemption through lifetime gifts avoids estate tax but forgoes the step-up in basis for those assets.

For assets with significant built-in capital gains, families must weigh the estate tax savings of a lifetime transfer against the income tax cost of losing the basis step-up. This analysis is particularly important for:

• Real estate with substantial appreciation (relevant to QPRTs)
• Concentrated stock positions
• Business interests
• Assets that may be sold shortly after the grantor's death

Trust Strategies to Consider Before the Sunset

The TCJA's enhanced exemption has made several irrevocable trust strategies particularly attractive for families with estates that exceed (or will exceed) the projected post-sunset exemption of ~$7 million per individual. Here is how each major trust type interacts with the TCJA window:

Spousal Lifetime Access Trusts (SLATs)

SLATs have become the most popular pre-sunset planning tool for married couples. Each spouse creates an irrevocable trust for the benefit of the other, effectively removing assets from both estates while preserving indirect access to the funds through the beneficiary spouse. A married couple can use SLATs to transfer up to $27.98 million (2025) out of their combined taxable estates while maintaining an economic safety net.

Irrevocable Life Insurance Trusts (ILITs)

ILITs remove life insurance proceeds from the taxable estate entirely. Under the TCJA, families can fund ILITs with premium payments that are sheltered by the enhanced gift tax exemption. For high-net-worth families, ILITs provide estate tax-free liquidity to pay estate taxes, equalize inheritances, or fund legacy goals — and the TCJA window makes funding these trusts more exemption-efficient than ever.

Dynasty Trusts

Dynasty Trusts are designed to last for multiple generations (potentially in perpetuity in states like South Dakota, Nevada, and Alaska that have abolished the Rule Against Perpetuities). The TCJA's doubled GST exemption allows families to allocate up to $13.99 million per individual (2025) to a Dynasty Trust, shielding that corpus — and all future growth — from estate, gift, and GST taxes at every generational transfer.

Grantor Retained Annuity Trusts (GRATs)

GRATs transfer asset appreciation to heirs with minimal gift tax cost. While GRATs work independently of the exemption amount (a "zeroed-out" GRAT uses no exemption), the TCJA environment makes GRATs especially powerful when combined with other strategies. For example, GRAT remainders can flow into Dynasty Trusts that are sheltered by the enhanced GST exemption.

Other Trust Types Worth Considering

• QPRTs — Transfer your personal residence at a discounted gift tax value, utilizing the enhanced exemption to shelter the gift.
• DAPTs — Combine asset protection with estate tax reduction by funding a self-settled trust in a permissive jurisdiction.
• Deferred Sales Trusts — Defer capital gains on asset sales through installment sale treatment; the TCJA did not change the capital gains rates that make DSTs attractive.
• Special Needs Trusts — Fund supplemental needs trusts for disabled family members using the enhanced exemption to avoid gift tax on the transfer.
• Spendthrift Trusts — Protect transferred assets from beneficiaries' creditors while utilizing the exemption window for the initial funding.
• MAPTs — While primarily a Medicaid planning tool, MAPTs funded during the enhanced exemption window avoid gift tax complications on the transfer.

What Families Should Do Now

With the sunset approaching, families with estates that exceed the projected post-sunset exemption should consider taking action. Here is a practical framework:

1. Quantify your estate. Work with your financial advisor to total your assets — including life insurance death benefits, retirement accounts, real estate, business interests, and investment portfolios. If your combined estate exceeds $14 million (married) or $7 million (individual), you are in the planning zone.
2. Calculate your remaining exemption. Review gift tax returns (Form 709) to determine how much of your lifetime exemption you have already used. The difference between the current exemption ($13.99M) and your used exemption is your available capacity.
3. Select the right trust vehicle. Based on your goals (access to assets, creditor protection, multi-generational transfer, etc.), work with an estate planning attorney to identify the appropriate trust structure. For most married couples, a SLAT is the starting point.
4. Fund irrevocable trusts before December 31, 2025. Completed gifts to irrevocable trusts lock in the enhanced exemption under the anti-clawback rule. The gift must be a completed transfer for gift tax purposes — not a promise or pledge.
5. Allocate GST exemption. If using Dynasty Trusts or other generation-skipping vehicles, file Form 709 and affirmatively allocate GST exemption to the transfer. Don't rely on automatic allocation alone.
6. Consider the step-up trade-off. For assets with significant unrealized gains, model the income tax cost of losing the basis step-up against the estate tax savings. In some cases, retaining highly-appreciated assets in the estate may be more tax-efficient.
7. Document everything. Ensure all trust documents, gift tax returns, and valuation reports are properly prepared and filed. The anti-clawback rule protects you, but only if the gifts are properly documented.