Dynasty Trusts After the 2026 Sunset

Somewhere in 2017, a great many Texas families were told that their estate-tax problem had been solved. The exemption had roughly doubled overnight — from about $5.5 million per spouse to $11 million and change — and for the first time in a generation, families with net worths in the low eight figures did not need to think especially hard about the federal transfer taxes. Life-insurance trusts stopped being drafted. Grantor trust freezes stopped being funded. The problem, we were told, would be reconsidered in 2026.

It is now the eve of 2026, and the reconsideration is upon us. On January 1, 2026, the doubled exemption sunsets. The base amount reverts, subject to inflation adjustments, to roughly half of what it is today — approximately $7 million per spouse rather than $14 million. Congress may act to extend it. Congress may not. The families who plan for the worse outcome will have preserved options; the families who wait to see will discover, in the ordinary way, that the best structures are unavailable to them at the moment they finally decide to act.

The dynasty trust — a long-duration irrevocable trust designed to hold appreciating assets outside of the transfer-tax system for multiple generations — was the vehicle of choice in the pre-2018 era and will be the vehicle of choice again. But the arithmetic has changed, and so has the drafting.

What the sunset actually means

The mechanics are less complicated than the commentary suggests. The Tax Cuts and Jobs Act of 2017 temporarily doubled the unified estate-and-gift exemption and the generation-skipping transfer exemption. That temporary doubling expires on December 31, 2025. Beginning January 1, 2026, the exemption reverts to the pre-2018 base, adjusted for inflation. Best estimates place the 2026 exemption at roughly $7 million per individual — meaning a married couple who does no planning will have roughly $14 million shielded, down from about $28 million today.

The critical point, and the one most often misunderstood, is this: transfers made before January 1, 2026, using the current elevated exemption, are not clawed back after the sunset. The IRS has issued anti-clawback regulations confirming this. Gifts made now — up to the current exemption — are permanently sheltered, even if the exemption available to your estate at death is lower. It is, functionally, a use-it-or-lose-it moment for a defined class of high-net-worth families.

Which structures still work

Not every dynasty structure survives contact with the harder 2026 rules with the same grace. Three deserve consideration first:

• ·Spousal Lifetime Access Trusts (SLATs). A grantor spouse funds an irrevocable trust for the benefit of the non-grantor spouse (and, typically, descendants). The gift consumes exemption; the assets appreciate outside of both spouses' estates; and the non-grantor spouse retains indirect access via discretionary distributions. Reciprocal-trust doctrine is the sharp edge — the two spouses' trusts must differ meaningfully in terms, timing, and trustees. Draft them a year apart, with different remainder classes, or the IRS will treat them as mutual and pull the assets back.
• ·Grantor Retained Annuity Trusts (GRATs). Especially attractive in low-interest-rate environments; less so now, but still viable. The grantor transfers appreciating assets in exchange for a fixed annuity for a term of years. Appreciation above the section 7520 rate passes gift-tax-free at the end of the term. Short-term rolling GRATs — two-year terms funded and refunded — are the standard technique.
• ·Sales to intentionally defective grantor trusts (IDGTs). The grantor sells appreciating assets to an irrevocable grantor trust in exchange for a promissory note bearing the AFR. The trust is a grantor trust for income tax purposes (so the sale is disregarded) but not for estate tax (so the assets are outside the estate). The grantor pays the income tax on trust income — a further gift-tax-free wealth transfer known as the 'tax burn.'

Congress may act to extend the exemption. Congress may not. The families who plan for the worse outcome will have preserved options.

Where Texas law adds an advantage

Texas is not a jurisdiction with a state-level estate tax. It is not South Dakota or Delaware — the popular jurisdictions for asset-protection dynasty trusts. But Texas has quietly become one of the more favorable states for long-duration trust drafting for reasons that rarely appear in the marketing:

• ·Rule against perpetuities. Texas permits a trust to endure for 300 years under a 2021 amendment to Section 112.036 of the Texas Property Code. This is not the unlimited duration available in some states, but it is functionally three centuries — long enough for any reasonable dynastic purpose.
• ·Directed trust statute. Texas permits the trustor to bifurcate trustee duties — a trust protector may direct investments while a corporate trustee handles administration. This allows a family to retain investment discretion (particularly useful when the trust holds operating businesses) without unwinding the estate-tax benefit.
• ·Community-property nuance. A Texas SLAT funded with community property requires careful marital-property planning. The gift is generally treated as one-half from each spouse. Consider a partition agreement to convert community property to separate property before funding — cleaner accounting, cleaner reciprocal-trust analysis.

The structure most families should consider

There is no universal answer. But for a Texas couple with a taxable estate in the range of $25 million to $75 million — the range in which the sunset makes a meaningful difference — the archetypal 2025 structure looks approximately like this:

• ·One or two irrevocable, long-duration grantor trusts (Texas-situs, drafted for maximum flexibility)
• ·Funded with a mix of gifted assets (using current exemption) and installment-sale assets (further estate freeze)
• ·Grantor-trust status carefully preserved during the wealth-transfer window; toggled off later if desired
• ·A trust protector with the power to modify trustee, situs, and administrative terms as the tax landscape evolves
• ·Life insurance held inside an ILIT layered over the top — funded during years when premiums are affordable, as liquidity insurance for the estate

What to do this year

The families who will benefit most from the sunset are those who begin the conversation now and complete the transactions by mid-2025. Trust drafting is not a race, but it is a queue — and every high-net-worth family with a sophisticated advisor will be in that queue in the second half of 2025. Appraisers, trustees, and drafting attorneys become genuinely constrained. The last quarter of 2025 will be difficult.

The unhurried transactions happen in the first two quarters of the year. That is when the counsel can be thoughtful, the appraisals can be defended, and the family can absorb the psychological weight of transferring meaningful wealth into structures they cannot easily unwind.

A word on restraint

There is a temptation, in a use-it-or-lose-it moment, to over-fund. To transfer more than the family will realistically feel comfortable transferring. To exhaust exemption on assets whose appreciation the family may wish they had kept close.

The families who look back with the fewest regrets in 2035 are, almost without exception, the families who under-funded in 2025 — who kept a comfortable cushion of taxable estate, who did not push the gift-tax cliff, and who preserved liquidity outside the trust for opportunities and comforts that could not be predicted at the time of transfer.

The exemption may be permanently useful. It is also permanently gone once used. Fund what you can afford, not what the table permits.

Closing

Dynasty planning is not a competitive exercise. It is a considered one. The families who will be well-served by the 2026 sunset are the families who begin the conversation with clarity about their own wealth, their own children, and their own comfort with irrevocability — and who then execute, calmly, in the first two quarters of the year.

The exemption will contract on January 1, 2026. It may or may not be restored. The families who assume it will not be, and who plan accordingly on a comfortable timeline, will be the families who look back on the sunset as an opportunity — not a deadline.

— Darryl V. Pratt is the Managing Partner of Lone Star Counsel, PLLC, an Attorney and CPA practicing in Frisco, Texas. This essay is provided for educational purposes and does not constitute legal or tax advice. For counsel on your specific matter, please request a conference.