Estate Tax Exemption

The federal estate tax applies a 40% rate to the taxable portion of a deceased person's estate — but the vast majority of Americans never pay it because of the lifetime exemption. In 2026, each individual can pass up to $15 million in assets to heirs free of federal estate tax, and married couples can effectively combine exemptions to shelter roughly $30 million through portability. These elevated exemptions were set by the One Big Beautiful Bill Act, which made permanent the TCJA's doubled exemption rather than letting it sunset back to roughly $7 million as prior law had scheduled. For households with estates well under $15 million, federal estate tax planning is largely irrelevant — state estate taxes (12 states plus DC have them, with much lower exemptions in some) may still matter. For estates in the $5–30 million range, the permanent high exemption combined with the step-up in basis means the focus of estate planning has largely shifted from estate tax minimization to income tax optimization.

Current Law (2026)

The federal estate tax applies to the transfer of a deceased person's assets. Each individual has a lifetime exemption — estates valued below this threshold owe no federal estate tax.

Legal Authority

• 26 U.S.C. § 2001 — Imposition and rate of tax
• 26 U.S.C. § 2010 — Unified credit against estate tax
• 26 U.S.C. § 2031 — Definition of gross estate
• 26 U.S.C. § 2051 — Definition of taxable estate
• IRC Section 2010(c)(3) — TCJA increased exemption

How It Works

The federal estate tax is structured around a unified credit — a credit equal to the tax on $15 million of transfers per individual in 2026. Technically the tax is calculated first and then offset by the credit, but the practical effect is that estates up to $15 million owe nothing and estates above that threshold pay 40% on the excess. That rate applies to the taxable estate — the gross estate minus allowable deductions.

The gross estate encompasses everything the decedent owned or controlled at death: real estate, bank and brokerage accounts, business interests, personal property, and retirement accounts (which pass to beneficiaries but still count in the gross estate for estate tax purposes). Life insurance death benefits are included if the decedent held any "incidents of ownership" — the right to change the beneficiary, borrow against the policy, or assign it (26 U.S.C. § 2042). Certain lifetime transfers made with retained control or benefit can also be pulled back into the gross estate under § 2036 (retained interest) and § 2038 (revocable transfers), which is why revocable living trusts don't reduce estate tax even though they avoid probate.

Key deductions reduce the taxable estate. The unlimited marital deduction eliminates tax on all transfers to a U.S. citizen surviving spouse regardless of amount — meaning no federal estate tax is owed at the first spouse's death no matter how large the estate. An unlimited charitable deduction applies to qualifying bequests. Deductions are also allowed for outstanding debts, mortgages, funeral expenses, and estate administration costs (attorney fees, executor commissions, court costs). The marital deduction defers rather than eliminates the estate tax — the entire estate rolls to the survivor, who then faces the estate tax alone at their own death.

Portability allows a surviving spouse to claim the deceased spouse's unused exemption (DSUE), stacking both $15 million exemptions for a combined $30 million shield. But portability is not automatic: the executor must elect it on Form 706 within 9 months of death (extendable to 15 months via Form 4768). This filing is required even when the estate owes zero tax and would otherwise have no obligation to file. Failing to elect portability permanently forfeits the unused exemption — potentially millions of dollars of tax-free transfer capacity gone for want of a timely return. See Estate Tax Portability for the complete mechanics.

The estate tax exemption is unified with the gift tax: each dollar of taxable lifetime gifts above the annual exclusion ($19,000 per recipient in 2026) reduces the remaining estate tax exemption dollar-for-dollar. A person who made $3 million in taxable lifetime gifts enters death with a $12 million exemption rather than $15 million. This unification prevents circumventing the estate tax through large deathbed gifts. Inherited assets generally receive a step-up in basis to fair market value at death, eliminating embedded capital gains — a significant income tax benefit that creates strategic tension between giving assets during life (basis carries over, no capital gains escape) versus holding them until death (gains disappear but estate tax applies above the exemption).

How It Affects You

State Variations

Implementing Regulations

• 26 CFR Part 20 — Estate Tax Regulations (188 sections — the IRS implementing rules for the federal estate tax imposed by IRC Chapter 11; no formal subparts but organized by IRC section; key provisions):
  • §§ 20.2010-1 through 20.2010-3 — Unified credit and portability: computation of the basic exclusion amount ($15 million for 2026 decedents); rules for claiming the deceased spousal unused exclusion (DSUE) — the surviving spouse must timely elect portability on a Form 706 filed within 5 years of the decedent spouse's death (extended from 2 years by Rev. Proc. 2022-32); the DSUE is locked at the first spouse's exclusion amount as of their death, not subsequently adjusted for inflation; § 20.2010-3 governs the surviving spouse's applicable exclusion amount computation
  • §§ 20.2031-1 through 20.2031-8 — Valuation of gross estate: all property included at fair market value (the price a willing buyer and willing seller would agree to with neither under compulsion); publicly traded stocks valued at mean of high and low on the valuation date (§ 20.2031-2); business interests at net value based on earnings, asset value, and market comparables (§ 20.2031-3); household goods and personal effects at fair market value via qualified appraisal (§ 20.2031-6)
  • § 20.2032-1 — Alternate valuation date: executor may elect to value the gross estate 6 months after death (or at time of distribution if earlier) if both the total gross estate value and the estate tax owed are lower than at date of death — the election must reduce both; applies to all property; irrevocable once the return is filed
  • §§ 20.2036-1, 20.2038-1 — Retained interests and revocable transfers: § 20.2036 includes in the gross estate property transferred during life in which the decedent retained income, possession, or control (prevents deathbed transfers with strings attached; GRATs where grantor dies during the annuity term are pulled back); § 20.2038 similarly includes property subject to a power to alter, amend, revoke, or terminate
  • § 20.2042-1 — Life insurance in the gross estate: proceeds included if (a) payable to the estate, or (b) the decedent possessed any "incident of ownership" at death (right to change beneficiary, borrow against the policy, or assign it); estate tax avoidance through life insurance requires an Irrevocable Life Insurance Trust (ILIT) where the trust is the policy owner
  • §§ 20.2053-1 through 20.2053-10 — Deductions for expenses, debts, and mortgages: funeral expenses, administration costs (executor fees, attorney fees, court costs), valid debts of the decedent, and mortgages on included property; deductibility requires amounts actually paid from estate assets; contested claims deducted only to the extent paid or adequately documented
  • §§ 20.2055-1 through 20.2055-3 — Charitable deduction: unlimited deduction for qualifying charitable transfers (501(c)(3) organizations, governmental bodies); Charitable Remainder Trusts and Charitable Lead Trusts qualify only to the extent of the charitable interest computed at the § 7520 applicable federal rate
  • §§ 20.2056-1 through 20.2056-11 — Marital deduction: unlimited deduction for property passing to a U.S. citizen surviving spouse; QTIP trusts qualify under § 20.2056(b)-7 when the surviving spouse receives all income annually and the executor makes the QTIP election on Form 706; § 20.2056A covers qualified domestic trusts (QDOTs) for non-citizen spouses (deferred tax until distribution or surviving spouse's death)
  • §§ 20.6018-1 through 20.6018-4 — Return filing: Form 706 due 9 months after the date of death; automatic 6-month extension via Form 4768; portability election requires Form 706 even when no tax is owed; estates must obtain an IRS closing letter or account transcript before distributing assets to heirs
• 26 CFR Part 25 — Gift tax regulations: unified credit against gift tax (coordinated with estate tax exemption under the transfer tax system)
• 26 CFR Part 300 — User fees: estate tax closing letter fee (fee for requesting an estate tax closing letter from the IRS)
• 26 CFR 20.2010-1 — Unified credit against estate tax (computation of the unified credit; basic exclusion amount; deceased spousal unused exclusion (DSUE) for portability elections)
• 26 CFR 1.1014-10 — Basis consistency requirement (property acquired from a decedent must use the value reported on the estate tax return as the income tax basis)

Pending Legislation (119th Congress)

Multiple bills take different approaches to future estate-tax policy:

• HR1301 / S587 — Death Tax Repeal Act — Full repeal of federal estate and GST taxes; replace with gift tax regime with $10M lifetime exemption and 18-35% rate brackets (Rep. Feenstra, R-IA / Sen. Thune, R-SD)
• HR601 — Estate Tax Rate Reduction Act — Set a uniform 20% rate on estates, gifts, and generation-skipping transfers (Rep. Arrington, R-TX)
• HR110 — Small Business Prosperity Act — Repeal estate tax while keeping basis step-up for heirs (Rep. Biggs, R-AZ)
• HR4330 — Cut estate/gift tax exemption to $7M and fund Early Childhood Education Trust Fund with a share of estate tax revenues (Rep. Jacobs, D-CA)
• SJRES72 — Nullify IRS rule updating estate tax closing letter user fees (Sen. Whitehouse, D-RI)

Recent Developments

• IRS set the 2026 exclusion at $15 million: Revenue Procedure 2025-32 increased the basic exclusion amount from $13,990,000 for 2025 decedents to $15,000,000 for 2026 decedents — a significant inflation adjustment.
• Anti-clawback protection still matters: Treasury's anti-clawback regulation (T.D. 9884) remains important for families that used large portions of the pre-sunset exemption through lifetime gifts made before December 31, 2025.
• OBBBB makes TCJA exemption permanent (2025-2026): The "One Big Beautiful Bill Act" reconciliation package moving through Congress includes a provision making the doubled TCJA exemption permanent — preventing the scheduled sunset to approximately $7 million (indexed) after December 31, 2025. With OBBBB's enactment expected in 2025-2026, the elevated $13-15M exemption is likely to persist. This dramatically reduces the number of estates subject to federal estate tax: under the doubled exemption, fewer than 2,500-3,000 estates per year pay federal estate tax (down from ~50,000+ before EGTRRA 2001's phase-out).
• Planning for OBBBB uncertainty: During the window before OBBBB's enactment was certain, estate planners encouraged high-net-worth clients to use all available exemption through lifetime gifts. The anti-clawback regulation protects these gifts even if the law changes. With OBBBB now likely to make the higher exemption permanent, the urgency for additional gifting has reduced — but trusts and other planning structures created during 2021-2025 remain in place and may have ongoing administration implications.
• State estate taxes persist: 17 states and D.C. impose their own estate or inheritance taxes with lower exemption thresholds — often $1-5 million. Oregon ($1M), Massachusetts ($1M), and Connecticut ($12.9M) represent opposite ends of state exemption ranges. For residents of these states, state estate tax planning remains important even when the federal exemption fully shields an estate. The TCJA federal changes did not affect state estate taxes, and the OBBBB extension doesn't either.