Guide · Tax
US Estate Tax: Federal Exemptions, State Rules, and Planning Basics
Most Americans will never owe federal estate tax — the exemption is nearly $14 million. But with those thresholds due to roughly halve at the end of 2025, far more families face exposure. Understanding how the tax works, what portability means, and what planning tools exist is essential for anyone with significant assets.
How the federal estate tax works
The federal estate tax is levied on the taxable estate of a person who has died. The taxable estate is the total gross estate — everything owned at death including real estate, investments, retirement accounts, life insurance proceeds, and business interests — minus allowable deductions such as debts, funeral expenses, and amounts left to a surviving spouse (the unlimited marital deduction). The exemption amount is subtracted, and any remainder above that threshold is taxed at a top rate of 40%.
Portability allows a surviving spouse to inherit the deceased spouse's unused exemption (called the DSUE — Deceased Spousal Unused Exclusion). To claim it, the executor must file Form 706 within nine months of death even if no estate tax is owed. Missing this deadline permanently forfeits the portability election, so it is critical to act promptly regardless of estate size.
The 2026 sunset: a planning deadline
The current high exemptions were created by the Tax Cuts and Jobs Act of 2017, which temporarily doubled the baseline. These provisions expire on 31 December 2025. Unless Congress extends them, the exemption reverts to approximately $7 million (inflation-adjusted) per person in 2026 — roughly halving the current threshold.
| Estate value | Tax (2025 rules) | Tax (est. 2026, ~$7M exempt) | Difference |
|---|---|---|---|
| $5M | $0 | $0 | $0 |
| $10M | $0 | $1,200,000 | $1,200,000 |
| $15M | $404,000 | $3,200,000 | $2,796,000 |
| $20M | $2,404,000 | $5,200,000 | $2,796,000 |
Estimates assume single filer, no deductions beyond the exemption. 2026 exemption estimated at $7M (inflation-adjusted baseline). Actual amounts depend on Congress and IRS inflation adjustments. Professional advice is essential.
State estate taxes: a second layer
Twelve states and the District of Columbia impose their own estate tax, completely independent of the federal tax. State exemptions are typically far lower. Massachusetts and Oregon each have a $1 million exemption — meaning estates that comfortably avoid federal tax can still owe significant state tax. Washington State has a top rate of 20%, higher than the federal 40% top rate on amounts above its exemption.
Seventeen states plus DC also have inheritance taxes (levied on the beneficiary rather than the estate) or some combination of both. Moving to a different state before death, or careful titling of real estate held in high-tax states, can be part of a broader estate plan for those with large estates or property in multiple states.
Planning tools: gifts, trusts, and annual exclusions
The annual gift tax exclusion for 2025 is $18,000 per recipient. A married couple can gift $36,000 to each child, grandchild, and any other person per year without using any lifetime exemption. A family with three children and six grandchildren can transfer $324,000 per year out of the taxable estate with no gift tax consequences.
Irrevocable trusts are the primary vehicle for larger transfers. A Spousal Lifetime Access Trust (SLAT) allows one spouse to gift assets to a trust for the other spouse's benefit, removing them from both estates while retaining indirect access. An Irrevocable Life Insurance Trust (ILIT) holds a life insurance policy outside the taxable estate, so the death benefit passes to heirs free of estate tax. Both structures require careful legal drafting and carry risks if the marriage dissolves. Professional legal and tax counsel is not optional in estate planning of this complexity.
Frequently asked questions
What is the federal estate tax exemption for 2025?
The federal estate and gift tax exemption for 2025 is $13.99 million per individual, inflation-adjusted from the $11.18 million baseline set by the Tax Cuts and Jobs Act of 2017. Married couples can effectively double this to $27.98 million through portability — provided the surviving spouse files an estate tax return (Form 706) to claim the Deceased Spousal Unused Exclusion within nine months of the first death, or within 15 months with an extension.
What happens to the estate tax exemption in 2026?
The TCJA's doubled exemption is scheduled to expire on 31 December 2025 unless Congress acts. Without new legislation, the exemption reverts to roughly $7 million per person (the pre-TCJA baseline of approximately $5.49 million, inflation-adjusted to 2026). Estates that were comfortably below the 2025 exemption could suddenly face significant federal estate tax. The window to take planning action — gifts, trust structures, business valuation discounts — is open now and closes at year-end.
Does my state have a separate estate tax?
Yes, potentially. Twelve states and the District of Columbia levy their own estate tax, often with much lower exemptions than the federal threshold. Massachusetts and Oregon have a $1 million exemption — meaning an estate worth $2 million could owe no federal tax but still face a significant state bill. Washington State's top rate reaches 20%. If you live in or own significant assets in a high-estate-tax state, state-level planning is as important as federal planning.
How can I reduce my estate tax exposure?
Several strategies reduce taxable estates legally. The annual gift tax exclusion ($18,000 per recipient in 2025) lets you transfer wealth without using your lifetime exemption — a couple can give $36,000 to each child and grandchild per year with no tax implications. Irrevocable trusts such as Spousal Lifetime Access Trusts (SLATs) and Irrevocable Life Insurance Trusts (ILITs) can shift assets outside the taxable estate while preserving some access or insurance benefits. Charitable giving via a Charitable Remainder Trust or donor-advised fund also reduces the gross estate. All of these strategies require qualified legal and tax advice given the complexity and the rule changes expected at year-end 2025.