How 5 Trusts Can Help You Ahead of the 2026 Estate Tax Exemption Changes

One or More of These Trusts Could Offer You Several Advantages, Especially by 2026. See What May Be Right for You.

The moves you make or don’t make in the next couple of years could critically change your estate tax liabilities. That’s because sunsetting tax laws are set to cut current estate tax exemptions roughly in half on January 1, 2026, assuming no new tax laws are passed first. 

If you think that’s a problem for your heirs to worry about, think again. 

The changing exclusions apply to federal estate taxes and gift taxes, meaning they could affect large gifts made during your lifetime and:

1. They could subject you to much greater tax liabilities if you haven’t taken the right steps ahead of time.
   
2. It’s not too late to get up to speed with what’s happening, figure out your options, and put some prudent strategies in place now.

To that end, let’s walk through five trusts that can offer powerful flexibility and solutions to prepare for the 2026 estate tax exemption change. Those trusts include: 

1. Irrevocable Life Insurance Trusts (ILITs)
2. Grantor Retained Annuity Trusts (GRATs)
3. Intentionally Defective Grantor Trusts (IDGTs)
4. Spousal Lifetime Access Trusts (SLATs)
5. Family Limited Partnerships (FLPs)

Below, we’ve covered some essential details about each type of trust, highlighting how each works, the potential advantages, and what to consider, particularly with sunsetting estate tax exclusions. If you need more answers now — or if it’s time to set up, adjust, or administer a trust — contact an Austin trusts attorney at the Law Office of Todd A. Wilson, also known as TAW Law Texas. 

Background: How Estate Tax Exclusions Will Decline in 2026

The first step to understanding how trusts can be leveraged with estate tax exemptions is having a clear idea of what changes are on the horizon. Specifically, on Jan. 1, 2026, parts of a 2017 law that doubled estate and gift tax exemptions six years ago will expire. When that happens:

• Estate and gift tax exemptions will go back to their 2017 levels.
  
• That could mean that these exemptions revert to roughly $7 million for individuals and around $14 million for married couples. For perspective, the 2023 estate and gift tax exemption is $12.92 million for individuals and $25.84 million for married couples. Here’s a breakdown of projected estate tax exemptions for 2024 and 2025.
  
• Your estate plan and the strategies you’ve relied on may not be as effective as you expect if your plans didn’t factor in these changes. That could leave you open to more vulnerabilities, higher costs, and ballooning estate tax liabilities.
  
• Tax rates as high as 40% could come into play, exposing more of your estate to some of the highest applicable tax rates.
  
• In 2026, you may be looking back at this moment right now, deeply regretting that you didn’t do just a little bit more to get your ducks in a row and prepare for the changing estate tax exemptions. 

Of course, all of this comes with one key disclaimer — New tax laws passed between now and 2026 could set all-new numbers for estate tax exemptions, shaking up expectations and best-laid plans. 

There’s no way to tell if, when, or even whether that could happen, and relying on what legislators could do is not the best way to make smart moves with your estate plan. 

Instead, consider the five trusts below. These trusts may give you a much better approach to planning for changing estate and gift tax exemptions well before 2026.  

5 Trusts to Mitigate Estate Tax Liabilities: ILITs, GRATs, IDGTs, SLATs & FLPs

Not every trust that follows will work for every individual or every estate plan. Still, many folks can discover some real value in creating at least one of the following trusts before Dec. 31, 2025, if they haven’t done so already. 

1. Irrevocable Life Insurance Trusts (ILITs)

ILITs hold life insurance policies and death benefits to shield them from estate taxes without triggering estate tax exemptions. With ILITs: 

• The grantor (i.e., the individual creating the trust) will name a trustee who will also be the owner of the life insurance policy.
  
• If the grantor doesn’t already have a life insurance policy, they can fund the trust with enough cash so that the trustee can take out this policy.
  
• The trustee will generally also be the beneficiary of the life insurance policy.
  
• When the insured individual passes away, the proceeds are paid to the ILIT, with the trustee responsible for collecting the funds. This removes the death benefits from the estate, so they are no longer subject to federal estate taxes.
  
• These trusts cannot be altered or terminated once they have been created because they are irrevocable trusts. 

Keep in mind that the assets transferred to irrevocable life insurance trusts typically do not qualify for the gift tax exclusion. Nevertheless, ILITs can be tax-saving devices when set up properly. 

Potential ILIT Advantages

You may be able to give the maximum amount of death benefits to your chosen beneficiaries, without a chunk going out to estate taxes.

What to Consider with ILITs 

ILITs come with A LOT of rules and red tape. If you don’t follow them, they may not deliver the benefits you thought they would. 

In fact, for ILITs to be effective, the grantor can’t pass away within three years of setting up the trust. In other words, there’s a 3-year survival rule, requiring that grantors live for at least three years (from the date a life insurance policy is transferred into the trust) in order for death benefits to be excluded from the estate. If that doesn’t happen, those benefits can become part of a decedent’s estate, despite the existence of the irrevocable life insurance trust. 

Also, if the estate’s personal representative is named as the beneficiary of the ILIT, the death benefits can be included in the estate and, consequently, subject to estate taxes. 

All of that highlights how pivotal it is to work with someone who understands the ins and outs of ILITs, like an experienced Austin trusts and estate planning lawyer at TAW Law Texas. 

2. Grantor Retained Annuity Trusts (GRATs)

Like ILITs, GRATs are irrevocable trusts that can be used to transfer specific assets to beneficiaries while bypassing estate and gift tax exemptions and liabilities. Grantor retained annuity trusts work differently than ILITs and other trusts, though. That’s because:

• A grantor can fund GRATs with various assets, not just cash or a life insurance policy. Usually, GRATs are funded with assets that are expected to appreciate over the term of the trust, like stocks, bonds, royalties, and business interests.
  
• GRATs essentially “hold” an asset for the term of the trust, which is set by the grantor. While the GRAT is active, the grantor will collect a specified annuity payment, at least once a year. The grantor details the amount and frequency of the GRAT annuity payments when setting up the trust.
  
• Generally, annuity payments are a percentage of the total assets held by the trust, with payments often structured to return the value of the original assets to the grantor over the term of the GRAT.
  
• When the trust expires, the remaining assets in the GRAT — meaning the appreciation of the assets held by the trust — are then transferred to beneficiaries without invoking estate and gift tax obligations or exemptions.

GRATs tend to be the most successful when they hold income-producing assets and when they’re used in low-interest-rate environments.

Potential GRAT Advantages

GRATs can provide a number of advantages when structured correctly. In fact, the key advantage of GRATs is having the flexibility to:

• Transfer gifts (the appreciation of the trust’s assets) to beneficiaries while bypassing estate and gift tax exemptions.
  
• Keep the GRAT’s assets out of an estate, thereby reducing the value of the estate and any related estate taxes

Consequently, you don’t have to have a high net worth to benefit from a GRAT, especially with estate tax exemptions set to change by 2026.

What to Consider with GRATs

GRATs tend to be complicated trusts, with a lot of moving parts, distinct rules, and applicable Internal Revenue Codes that all have to be addressed and handled with care. Beyond that, GRATs can also be a gamble because they operate on these two critical assumptions: 

1. The assets used to fund the GRAT will appreciate over the life of the trust: If that doesn’t happen, GRATs can’t deliver the intended benefits because there won’t be anything to pay out to beneficiaries if the GRAT’s assets haven’t appreciated by the time the trust expires. That can mean wasted effort and resources in setting up the GRAT because it couldn’t be used for its primary purpose (i.e., transferring appreciation from the trust’s assets to beneficiaries).
   
2. The grantor will survive the GRAT: If grantors pass away before the trust expires, the assets of the trust can be included in the decedent’s taxable estate, negating the potential tax advantages that grantor retained annuity trusts are expected to provide. However, GRATs can be set up to transfer annuity payments to a surviving spouse if a grantor dies, possibly preserving the tax advantages available with this estate planning strategy. 

Ultimately, there’s a lot to consider with GRATs, and there are ways to set these trusts up with limited risks and better chances of successful outcomes. That’s especially true when you work with a top-rated Austin trusts lawyer at TAW Law Texas. Our team offers free, confidential consultations, so you can get the answers you need about GRATs, ILITs, and so much more.

3. Intentionally Defective Grantor Trusts (IDGTs)

Another type of irrevocable trust that can be a viable estate and gift tax mitigation strategy is the intentionally defective grantor trust. Though “defective” by name, IDGTs are not actually or inherently “defective” by nature. That’s because the “defect” in question is a “loophole” of sorts, referring to the unconventional structure of IDGTs that: 

1. Excludes the trust’s assets from the estate
   
2. Lets the grantor continue to pay the taxes for any income generated by the trust’s assets, even though the grantor doesn’t technically own those assets (because the trust does)
   
3. Freezes the value of the gifts that will ultimately be transferred to beneficiaries, bypassing estate and gift tax exemptions in the process

IDGTs are often set up to transfer wealth from one generation to the next, with:

• Grantors’ children and/or grandchildren commonly named as beneficiaries of these trusts. 
• The trusts’ assets passed to beneficiaries after the grantor passes away.

Potential IDGT Advantages

When set up and funded properly, intentionally defective grantor trusts offer another option for passing wealth to beneficiaries without counting against or activating estate or gift tax exemptions. By paying income taxes on the trust’s assets, grantors can maximize the assets transferred to beneficiaries while keeping those assets out of their taxable estates.

What to Consider with IDGTs

IDGTs have to be fully and adequately funded to provide any benefits, and grantors will have the option to gift or “sell” assets to these trusts when funding them. While gifting assets could raise issues of gift taxing, selling assets to IDGTs can get around this issue. Often, grantors set up installment sales, with promissory notes, to fund IDGTs by selling assets to these trusts. 

That’s just one of many sensitive matters that can arise with IDGTs. From grantor deaths to income tax liabilities, swapping out trust assets, and more, IDGTs can be tricky to understand, navigate, and administer without a skilled professional. And any mistakes or oversights could dilute the advantages you and your beneficiaries may be able to achieve from an intentionally defective grantor trust.

With our Austin trusts attorneys in your corner, however, you can be confident in both your IDGT and your estate plan.

4. Spousal Lifetime Access Trusts (SLATs)

Married couples can use spousal lifetime access trusts, another type of irrevocable trust, to pass certain assets to their spouses:

1. Outside of their shared estates
2. Without counting towards any estate and gift tax exemptions

SLATs can be set up by one or both spouses. If one spouse sets up a SLAT, that donor spouse will fund the trust for the benefit of the other (non-donor) spouse and/or their children. With that, SLATs can be another effective mechanism for transferring generational wealth and mitigating estate tax liabilities. 

Potential SLAT Advantages

Married folks can leverage more options for wealth and asset transfers with properly constructed SLATs. In fact, while SLATs can be used alone or with other trusts as part of a greater estate plan, they can also be set up as grantor trusts for even more tax advantages in some situations.

What to Consider with SLATs

SLATs can be complicated to construct, and they may raise thorny issues in the event of divorce. Beyond those risks, it’s crucial to consider the facts that: 

1. Spousal lifetime access trusts have to be carefully devised, so they don’t violate the reciprocal trust doctrine. If that happens, the assets of the trust could end up back in the spouses’ shared estate.
   
2. If SLATs are funded with gifted assets, gift taxes may come into play. Additionally, the assets used to fund the trust should be owned by the donor spouse(s). Property shared between donor and non-donor spouses should generally not be used to fund SLATs.

With these and other considerations for SLATs, a knowledgeable trusts lawyer at the Law Office of Todd A. Wilson or TAW Law Texas can offer invaluable insight and counsel. 

5. Family Limited Partnerships (FLPs)

Unlike ILITs, GRATs, IDGTs, and SLATs, family limited partnerships are not irrevocable trusts. Instead, FLPs are general or limited partnerships that act more like “pass-throughs” or “holding zones” for assets, like (but not limited to): 

• Real estate
• Family business interests 
• Stocks and other investments

Beyond holding and managing assets, FLPs can give members a way to:

1. Add more assets at any time going forward: That can make it easier to gather funds from members for new projects, opportunities, and investments. 
2. Collect distributions: Members can receive dividends, according to the FLP’s terms, simplifying and routinizing payouts.
3. Mitigate certain tax obligations: The partners of an FLP will generally share some portion of any income tax obligations while the FLP itself is not subject to any taxes. With this, members can reduce the size of their individual estates. 

With these dynamics, FLPs can be another effective way to address changing estate tax exemptions while providing other benefits.

Potential FLP Advantages

Flexibility, tax savings, and bypassing estate and gift tax exemptions are a few of the main advantages of family-limited partnerships. Depending on the circumstances, needs, and goals, FLPs can offer other benefits too, both in and outside of the realm of estate planning.

What to Consider with FLPs

FLPs are complex devices that could expose you to some risks and liabilities IF these partnerships are set up hastily, improperly, or without the right guardrails in place. Also, with FLPs:

• Transferring assets to minors can be challenging. Other trusts may offer better options for passing assets to minors or preserving them for minor beneficiaries until they reach a certain age.
  
• One member’s debts may not be just their problem or liability. All members can be affected by and potentially responsible for other members’ debt.

When it comes to family limited partnerships, the bottom line is that FLPs can offer some remarkable flexibility and advantages for those who set them up with the support of seasoned trust attorneys in Austin, Texas. 

Find Out What Trusts & Other Estate Planning Options May Be Right for You

Getting your estate plan — and your estate and gift taxing strategies — in better shape doesn’t have to be challenging. A click or call can be a fast, simple way to get on track and start preparing for the changes ahead while there’s still time to make the right moves. 

At TAW Law Texas, our Austin trusts and estate planning lawyers are here for you, ready to help you make better plans that anticipate and insulate you from tax law changes while helping you protect your interests and achieve your goals. Find out more about your options, what else to consider with the impending changes to estate tax exemptions, and how we can help you in a free, no-obligation consultation. Just contact us for more answers today.

Todd A. Wilson

Todd A. Wilson has been practicing law since 2007, with the aim of educating all strata of society and sharing crucial insights about the importance of estate planning, probate, and more.

The Law Office of Todd A. Wilson (also known as TAW Law TX) offers affordable estate planning and probate services.