FEDERAL ESTATE TAX
Rates, Exemptions, and Planning Strategies
The federal estate tax affects only the wealthiest estates in America. Starting Jan. 1, 2026, estates under $15 million per person or $30 million per couple are exempt. Fewer than 0.2% owe any tax, and only amounts above those limits are taxed at 40%.
Understanding
Federal Estate Tax
The federal estate tax represents a tax levied on the transfer of property at death. Administered by the Internal Revenue Service, this tax applies to the fair market value of all assets owned by a decedent at the time of death, minus allowable deductions. The system operates on a unified credit approach, meaning that lifetime gifts and estate transfers are considered together under one comprehensive exemption.
Federal Estate Tax Key Numbers
| TAX ELEMENT | AMOUNT |
|---|---|
| Individual Exemption | $15,000,000 |
| Married Couple Exemption | $30,000,000 |
| Annual Gift Exclusion | $19,000 per recipient |
| Tax Rate on Excess | 40% |
These amounts, effective Jan. 1, 2026, are indexed annually for inflation. The federal estate tax exemption for 2025 is $13,990,000 per individual ($27,980,000 for married couples).
The annual gift tax exclusion allows you to give a specified amount per recipient each year without using your lifetime exemption or filing a gift tax return. Any estate value exceeding the exemption thresholds faces taxation at a flat rate of 40% on the excess amount.
Estates Subject to Federal Estate Tax
- Individual estates exceeding the federal exemption threshold
- Combined marital estates exceeding the married couple exemption after both spouses pass away
- Estates that have used significant lifetime gift tax exemptions
Estates NOT Subject to Federal Estate Tax
- Estates under the exemption threshold
- Assets passing to surviving U.S. citizen spouses (unlimited marital deduction)
- Qualified charitable bequests
- Properly structured trust arrangements
The unlimited marital deduction effectively allows married couples to defer any estate tax until the second spouse's death, providing significant planning flexibility for most families.
Federal Estate Tax Exemption History and Stability
Federal estate tax exemptions have fluctuated significantly over the decades, reflecting changing legislative priorities. Changes to federal law in 2025 established substantially higher permanent exemption levels, providing greater predictability for long-term wealth transfer planning.
Key changes include:
The first step is to calculate the gross estate, which includes all property in which the deceased had an interest at the time of death. This encompasses:
- Current exemptions are permanent (no automatic sunset provision)
- Annual inflation adjustments maintain purchasing power
- Changes would require new Congressional action
- Portability provisions allow surviving spouses to use deceased spouse's unused exemption
This legislative stability allows families to focus on comprehensive wealth transfer strategies rather than racing to implement plans before arbitrary deadlines. While future Congresses could modify estate tax laws, the current framework provides a solid foundation for estate planning decisions.
State Estate Tax Complexity
While federal exemptions provide substantial protection, 12 states plus Washington, D.C., maintain their own estate tax systems with significantly lower thresholds. These state variations require careful analysis, particularly for families with multi-state property holdings or those considering relocation during retirement.
States with Estate Taxes
| STATE | APPROXIMATE EXEMPTION RANGE* |
|---|---|
| Conneticut | Matches federal exemption |
| Hawaii | $5 - $6 million |
| Illinois | $4 - $5 million |
| Maine | $6 - $7 million |
| Maryland | $5 - $6 million |
| Massachusetts | $1 - $2 million |
| STATE | APPROXIMATE EXEMPTION RANGE* |
|---|---|
| Minnesota | $3 - $4 million |
| New York | $6 - $7 million |
| Oregon | $1 - $2 million |
| Rhode Island | $1.5 - $2 million |
| Vermont | $5 - $6 million |
| Washington | $2 - $4 million |
| Washington, D.C. | $4 - $5 million |
State exemptions change frequently. All exemption amounts are current as of date of publishing.
Important State Tax Considerations:
- Most state estate tax exemptions are not portable between spouses (Connecticut is a notable exception)
- Some states impose "cliff" effects where exceeding the exemption threshold by even small amounts triggers tax on the entire estate
- Several states have inheritance taxes in addition to or instead of estate taxes
- State exemptions typically have different inflation adjustment mechanisms than federal exemptions
Unlike the federal system, most state estate tax exemptions are not portable between spouses, meaning that proper planning becomes even more crucial for married couples in these jurisdictions.
Integration with Broader Financial Planning
Estate tax planning shouldn't occur in isolation but rather as part of comprehensive financial and tax planning. Income tax consequences of various strategies may significantly impact their overall effectiveness, while gift tax implications must be coordinated with long-term estate tax objectives.
Key Integration Areas:
- Income tax optimization during wealth transfer
- Generation-skipping transfer tax for multi-generational plans
- State tax obligations based on residence and property locations
- Business succession planning for family enterprises
- Retirement planning and required minimum distributions
- Charitable giving strategies
- Asset protection considerations
The most successful planning approaches consider these various elements holistically, developing strategies that accomplish family objectives while minimizing total tax obligations across all relevant jurisdictions and time periods.
Addressing Common Misconceptions
Many families harbor misconceptions about estate taxation that can lead to unnecessary anxiety or poor
planning decisions.
Common Misconceptions Clarified:
"My heirs will pay taxes on their inheritance" - Estate tax is paid by the estate itself, not by individual heirs receiving inheritances. Beneficiaries generally receive their inheritance without additional federal tax obligations. The main exception is inherited retirement accounts (traditional 401(k), IRA), which are taxable when beneficiaries withdraw funds and do not receive stepped-up basis like other inherited assets.
"I need to rush to implement estate planning strategies" - While timely planning is always prudent, current federal exemption levels are permanent and indexed for inflation. Most families can approach estate planning methodically without artificial urgency, focusing on strategies that serve their long-term family objectives.
"Smaller estates don't need estate planning" - Estate tax planning represents just one aspect of comprehensive estate planning. Even estates well below federal exemption levels benefit from proper planning addressing probate avoidance, asset protection, healthcare directives, guardian designations, business succession, and state-level tax considerations.
"Federal estate tax planning eliminates all transfer taxes" - Families must consider state estate taxes, state inheritance taxes, and income tax implications. A strategy that minimizes federal estate tax might increase state tax liability or create adverse income tax consequences for beneficiaries.
Estate tax planning provides benefits beyond simple tax reduction, including asset protection, business succession facilitation and charitable giving optimization. Families often discover that comprehensive planning addresses multiple objectives simultaneously while providing greater certainty for future generations.
When Estate Tax Planning Becomes Essential
While most American families won't face federal estate tax, certain situations warrant professional estate tax planning
Estates Approaching Federal Thresholds:
- Individuals with estates over $10 million
- Married couples with combined estates over $20 million
- Families with rapidly appreciating assets (businesses, real estate, investments)
- State Estate Tax Exposure:
- Residents of states with estate taxes, particularly those with estates exceeding $2-5 million
- Owners of real property or business interests in multiple states
- Individuals considering interstate relocation
- Complex Family or Business Situations:
- Ownership of closely held businesses requiring succession planning
- Blended families with children from multiple marriages
- Beneficiaries with special needs requiring long-term asset protection
- Significant charitable giving objectives
- Specialized Assets:
- Valuable art collections, intellectual property or other hard-to-value assets
- Retirement accounts with large balances
- Stock options, restricted stock or other executive compensation
Frequently Asked Questions About Federal Estate Taxes
Q: Will my family pay estate taxes when I die?
For most Americans, the answer is no. With federal exemptions at $15 million per individual, only the wealthiest 0.2% of estates pay federal estate tax. However, if you live in one of the 12 states with estate taxes, you may face state estate tax liability at much lower threshold levels — some as low as $1 million.
Q: Will my children have to pay taxes on their inheritance?
Generally no. Estate taxes are paid by your estate before assets are distributed. Your children typically receive most inherited assets tax-free due to "stepped-up basis" rules, which reset the asset's tax cost to fair market value at your death. The main exception is inherited retirement accounts (401k, traditional IRA), which are taxable when your children withdraw the money and do not receive stepped-up basis treatment.
Q: How do the federal estate tax exemptions work for married couples?
Married couples effectively have double the individual exemption. Through "portability," a surviving spouse can use any unused portion of the deceased spouse's exemption. However, this requires filing an estate tax return (Form 706) when the first spouse dies, even if no tax is owed. Proper planning ensures both exemptions are preserved and available.
Q: What's the difference between the annual gift exclusion and the lifetime exemption?
The annual gift exclusion allows unlimited tax-free gifts to as many people as you want each year without affecting your lifetime exemption. Once you exceed the annual exclusion to any individual, you begin using your lifetime exemption. Most people never exhaust their lifetime exemption through gifting.
Q: My estate is worth $8 million. Should I be concerned about estate taxes?
For federal purposes, no — you're well below the exemption threshold. However, check your state's estate tax laws. States like Massachusetts ($2 million threshold), Oregon ($1 million) and Minnesota ($3 million) could impose significant state estate taxes on an $8 million estate. If you live in an estate tax state, consult an estate planning professional.
Q: Can estate planning strategies help with taxes other than estate tax?
Absolutely. Comprehensive estate planning addresses multiple tax concerns: income tax consequences for beneficiaries, state-level estate and inheritance taxes, generation-skipping transfer tax, capital gains tax management and retirement account distribution planning. The best strategies consider all tax implications holistically rather than focusing solely on federal estate tax.
Q: How often should I review my estate plan?
Review your estate plan every 3-5 years and whenever you experience significant life changes: marriage, divorce, births, deaths, substantial changes in net worth, interstate moves, business acquisitions or sales or changes in tax law. Even if your estate remains below federal thresholds, other aspects of your plan may need updating.
Q: Do I need an estate planning attorney, or can I do it myself?
While simple estates with straightforward beneficiary designations might use quality online tools, most families benefit from professional guidance. An attorney becomes essential if you: live in an estate tax state, have estates approaching exemption thresholds, own business interests, have blended families, need special needs planning or own property in multiple states. The cost of proper planning typically represents a fraction of potential tax savings and family conflict prevention.
