Important Disclaimer
The federal estate tax and state estate laws are complex. This guide provides an educational overview. Estate planning requires professional guidance from an estate planning attorney and, in many cases, a CPA. The 2026 exemption amount used here is an estimate pending final IRS guidance.
What Is the Estate Tax?
The federal estate tax is a tax on the transfer of wealth from a deceased person (the “decedent”) to heirs. It is paid by the estate before assets are distributed — not by the heirs on what they receive (that would be an inheritance tax, which only some states have; the US federal government does not impose one).
The tax applies to estates that exceed the federal exemption — if your total estate is below the exemption, you owe no federal estate tax and no return needs to be filed (unless you need to elect portability for your surviving spouse).
The 2026 Federal Exemption: The TCJA Sunset
This is the critical planning issue of the moment. The 2017 Tax Cuts and Jobs Act (TCJA) temporarily doubled the estate tax exemption to about $12 million per individual (indexed for inflation, reaching $13.99M in 2025). This doubled exemption was designed to expire after December 31, 2025 — a built-in “sunset” to keep the 10-year budget scoring within limits.
After the sunset, the exemption reverts to approximately $7 million per individual for 2026 (the pre-TCJA $5M base, adjusted for inflation). The exact 2026 figure will be announced by the IRS in a revenue procedure — use ~$7M for planning now and confirm the exact number with your attorney.
How the Tax Is Calculated
Step 1: Start with the Gross Estate
The gross estate includes all assets the decedent owned an interest in at death:
- Real property (primary home, vacation property, investment real estate)
- Financial accounts (checking, savings, brokerage, IRAs, 401(k)s)
- Life insurance proceeds (if estate is the beneficiary or the decedent held incidents of ownership)
- Business interests (sole proprietorships, partnership interests, corporate shares)
- Certain gifts made within 3 years of death
Step 2: Subtract Deductions
The estate can deduct:
- Marital deduction — transfers to a US citizen surviving spouse (unlimited; none in our example)
- Charitable deduction — bequests to qualified charities (unlimited; $500,000 in our example)
- Debts and liabilities — mortgages, business loans, credit card debt ($200,000)
- Funeral and administrative expenses — burial, executor fees, legal fees ($50,000)
Step 3: Apply the Exemption
Net Estate = $12,000,000 − $750,000 deductions = $11,250,000 Taxable Estate = $11,250,000 − $7,000,000 exemption = $4,250,000
Step 4: Calculate the Tax
Federal Estate Tax = $4,250,000 × 40% = $1,700,000 Net to Heirs = $11,250,000 − $1,700,000 = $9,550,000
Portability: Doubling the Exemption for Married Couples
Since 2013, the federal exemption is portable between spouses. If the first spouse to die does not use their full exemption, the surviving spouse can add the unused portion to their own exemption — effectively doubling it.
This requires a timely-filed Form 706 estate tax return, even if the estate owes no tax. The election must be made on a return filed within 9 months of death (or up to 15 months with an extension). Missing this deadline forfeits portability.
For a married couple in 2026: combined effective exemption = ~$14 million if portability is properly elected.
Key Estate Planning Strategies
1. Annual Gift Exclusion ($18,000 in 2025; ~$19,000 expected for 2026) You can give up to the annual exclusion amount to any number of people per year, completely tax-free and with no impact on your lifetime exemption. For a married couple “gift-splitting,” that doubles to $36,000+ per recipient per year.
2. Irrevocable Life Insurance Trust (ILIT) Life insurance proceeds are includable in the gross estate if the decedent held incidents of ownership. Placing a policy in an ILIT removes it from the estate — the trust owns the policy and names your heirs as beneficiaries, keeping the proceeds out of the taxable estate while still providing liquidity to pay estate taxes.
3. Charitable Planning Charitable donations reduce the taxable estate dollar-for-dollar. Charitable Remainder Trusts (CRTs) and Charitable Lead Annuity Trusts (CLATs) provide income streams while reducing the taxable estate.
4. Act Before 2026 If you have a taxable estate above $7M but below the current (~$14M for couples) 2025 level, the TCJA window may be closing. Gifts made before the sunset that use the current higher exemption are generally not “clawed back” even if the exemption reverts. Consult an estate attorney now if your estate is in this range.