Estate Tax
Estate Tax
Quick Definition
The federal estate tax is a tax on the transfer of a deceased person's assets to their heirs. It applies only to the portion of an estate exceeding the federal exemption. Under the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, the exemption is permanently set at $15 million per individual ($30 million for married couples) as of January 1, 2026, indexed for inflation in future years. The top rate is 40%. Due to the high exemption, fewer than 0.2% of estates owe any federal estate tax.
What It Means
The estate tax is one of the most misunderstood taxes in America because of two myths:
- Myth: "I will owe estate taxes when I die." Reality: Only estates above $15 million (2026) owe any federal estate tax.
- Myth: "My heirs will pay taxes on everything I leave them." Reality: Heirs generally do not pay income tax on inherited assets (they get a step-up in basis). Only the estate itself owes estate tax.
For the vast majority of Americans, estate planning involves minimizing probate, organizing beneficiary designations, and potentially minimizing state estate taxes, not federal estate tax.
The OBBBA Change: What Happened in 2025
The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the estate tax exemption, but that doubling was scheduled to sunset on December 31, 2025. Without congressional action, the exemption would have reverted to approximately $7.2 million on January 1, 2026.
Congress acted. The OBBBA, signed into law on July 4, 2025, not only prevented the sunset but permanently increased the exemption. Instead of simply continuing the TCJA's doubled amount (which would have been about $14.3 million for 2026), Congress rounded the base up to $15 million and reset the inflation indexing base year to 2025.
| 2018-2025 before OBBBA | 2026 without OBBBA | 2026 with OBBBA | After 2026 under OBBBA | |
|---|---|---|---|---|
| Base exclusion | $10,000,000 | $5,000,000 | $15,000,000 | $15,000,000 |
| With inflation adjustment | $11.18M to $13.99M | ~$7.2M | $15,000,000 | $15M plus inflation after 2025 |
The OBBBA's permanent increase cost $212 billion in reduced federal revenue over 10 years, according to the Joint Committee on Taxation and Congressional Budget Office.
Federal Estate Tax Structure (2026)
| Estate Value | Tax Treatment |
|---|---|
| Under $15M | No federal estate tax (100% excluded by exemption) |
| $15M to $15M plus some | Only the excess over $15M is taxed |
| Excess over exemption | Progressive rates from 18% to 40% |
Top rate: 40% on taxable estate (amounts above the exemption)
For married couples: The unlimited marital deduction allows spouses to leave unlimited assets to each other tax-free. Portability allows the surviving spouse to use the deceased spouse's unused exemption, effectively creating a $30 million combined exemption.
Historical Exemption Amounts
| Year | Federal Exemption | Top Rate |
|---|---|---|
| 2001 | $675,000 | 55% |
| 2009 | $3.5M | 45% |
| 2011 | $5M | 35% |
| 2017 | $5.49M | 40% |
| 2018-2025 | $11.18M to $13.99M (TCJA doubled, indexed) | 40% |
| 2026 (OBBBA) | $15,000,000 (permanent, indexed from 2025 base) | 40% |
Estate Tax Calculation Example
Estate worth $20 million (single person, 2026):
| Item | Amount |
|---|---|
| Gross estate | $20,000,000 |
| Federal exemption | -$15,000,000 |
| Taxable estate | $5,000,000 |
| Estate tax (40% of taxable estate) | $2,000,000 |
| Net to heirs | $18,000,000 |
State Estate Taxes
Many states have their own estate taxes with much lower exemptions:
| State | Exemption (2026) | Top Rate |
|---|---|---|
| Massachusetts | $2M | 16% |
| Oregon | $1M | 16% |
| Washington | $2.193M | 20% |
| New York | $6.94M | 16% |
| Maryland | $5M | 16% |
| Connecticut | $15M (matches federal) | 12% |
| Illinois | $4M | 16% |
Most states have no estate tax. About 38 states and DC have eliminated their state estate tax. But for residents of states like Massachusetts (with a $1M exemption), state estate planning is necessary even for those well below the federal threshold.
The "Cliff" in Some State Taxes
Massachusetts and Oregon have a "cliff" in their estate tax. If the estate exceeds the exemption by even $1, the entire estate above $0 (not just the excess) is taxed. Planning to stay just under these thresholds is critical.
Estate Tax Planning Strategies
| Strategy | How It Works | Benefit |
|---|---|---|
| Annual gift exclusion | Give up to $19,000/year ($38,000 jointly) per recipient without using exemption | Gradually reduces taxable estate |
| Irrevocable Life Insurance Trust (ILIT) | Life insurance owned by trust, proceeds not in estate | Keeps policy death benefit out of taxable estate |
| GRATs (Grantor Retained Annuity Trust) | Transfer appreciating assets with minimal gift tax | Moves future appreciation out of estate |
| Qualified Personal Residence Trust (QPRT) | Transfer home at discounted value | Reduces estate while retaining use for term |
| Charitable giving | Donate to charity, estate deduction | Reduces taxable estate, fulfills philanthropic goals |
| Spousal transfers | Unlimited marital deduction | Defers estate tax until surviving spouse's death |
| Portability election | Surviving spouse claims unused exemption | Protects up to $30M for couples |
The annual gift tax exclusion remains $19,000 per donor per recipient in 2026 (unchanged from 2025). A married couple can gift up to $38,000 per recipient without using any lifetime exemption or filing a gift tax return.
Estate Tax vs. Inheritance Tax
| Feature | Estate Tax | Inheritance Tax |
|---|---|---|
| Who pays | The estate (before distribution to heirs) | The heirs who receive assets |
| Federal level | Yes (estate tax) | No federal inheritance tax |
| State level | Some states | 6 states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania) |
| Rate basis | Estate size | Relationship to deceased (closer relatives pay less or nothing) |
Six states have inheritance taxes: Iowa (being phased out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Spouses and often children are typically exempt. More distant relatives pay higher rates.
Related Concepts
- Gift Tax: The tax on transfers made during life, linked to the estate tax through the unified exemption
- Capital Gains Tax: The tax heirs avoid on inherited asset appreciation thanks to step-up in basis
- Trust: A legal vehicle used to manage and transfer assets outside probate
- Step-Up in Basis: Resets inherited asset cost basis to fair market value at death
- Tax Bracket: The progressive rate structure that applies to taxable estate amounts
- AGI: Adjusted gross income, relevant for income tax on inherited retirement accounts
Common Mistakes to Avoid
- Panicking about a sunset that did not happen: The TCJA exemption sunset scheduled for January 1, 2026 was permanently prevented by the OBBBA in July 2025. The exemption increased to $15 million, it did not drop to $7 million. If you undertook rushed gifting in 2025 to use the "expiring" exemption, that gifting still counts against your lifetime exemption but you now have more room.
- Ignoring state estate taxes: Even if your estate is well below the $15M federal exemption, you could owe significant state estate tax. Massachusetts taxes estates over $1M at up to 16%. Oregon's threshold is also $1M. Check your state's rules.
- Not filing a portability election: When the first spouse dies, the surviving spouse must elect portability on the estate tax return (Form 706) to preserve the deceased spouse's unused exemption. Missing this filing means losing up to $15M of combined exemption. The IRS allows a 5-year relief period for late portability elections, but do not rely on it.
- Forgetting that inherited retirement accounts are taxable: While inherited cash and stock are generally income-tax-free to heirs, inherited IRAs and 401(k)s are taxable when distributed because the original contributions were pre-tax. Under the SECURE Act, most non-spouse beneficiaries must empty inherited retirement accounts within 10 years.
Frequently Asked Questions
Q: Do I have to pay income tax on an inheritance? A: Generally no. Inherited cash and assets are not income to the recipient. The estate may have paid estate tax before distributing, but the heir does not owe income tax on the receipt. Exception: inherited IRAs and 401(k)s are taxable when distributed because the original contributions were pre-tax.
Q: What is the "step-up in basis"? A: When you inherit an asset (stocks, real estate), your cost basis is reset to the fair market value on the date of death. If the decedent bought stock for $10/share and it is worth $100/share when you inherit it, your basis is $100/share. You owe no capital gains tax on the $90 of appreciation during their lifetime. This is one of the most powerful estate planning benefits available.
Q: Did the estate tax exemption go down in 2026? A: No. The OBBBA, signed July 4, 2025, permanently set the exemption at $15 million per individual ($30 million for married couples) starting January 1, 2026. The feared TCJA sunset to approximately $7 million did not happen. The exemption is indexed for inflation in future years using 2025 as the base year.
Q: What is the annual gift tax exclusion for 2026? A: The annual gift tax exclusion is $19,000 per donor per recipient in 2026, unchanged from 2025. You can give $19,000 to any number of recipients without using any lifetime exemption or filing a gift tax return. Married couples can combine their exclusions to give $38,000 per recipient.
Related Terms
Gift Tax
The gift tax applies to transfers of money or property during your lifetime, but the annual exclusion ($19,000 per recipient in 2026) and lifetime exemption ($15 million) mean most people never owe gift taxes.
IRS
The IRS is the US federal agency responsible for administering and enforcing the tax code, collecting individual and business taxes, processing returns, and auditing compliance with federal tax laws.
Beneficiary
A beneficiary is a person or entity designated to receive assets from accounts like IRAs, 401(k)s, life insurance, and wills upon the owner's death. SECURE Act rules now require most non-spouse beneficiaries to empty inherited IRAs within 10 years.
Whole Life Insurance
Whole life insurance is permanent life insurance that provides a guaranteed death benefit for life, builds tax-deferred cash value, and charges premiums 5-15x higher than term. Best suited for specific estate planning and business needs rather than pure income replacement.
1031 Exchange
A 1031 exchange lets real estate investors defer capital gains taxes by reinvesting sale proceeds into a like-kind replacement property under strict IRS timelines.
Lien
A lien is a legal claim against property that secures a debt. The IRS filed 214,099 Notices of Federal Tax Lien in FY2025, up 36% from 2022. Learn how liens work and how to clear them.
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