What is estate tax?
Estate tax (sometimes called "death tax") is a federal tax on the transfer of your assets after you die. It applies to your entire taxable estate above the lifetime exemption — currently $13.99 million per individual ($27.98M for married couples) in 2026. The tax rate is a flat 40% on amounts above the exemption.
Despite generating headlines, federal estate tax affects fewer than 0.1% of all estates — about 4,000 estates per year out of 3+ million annual deaths. The reason: the exemption is so high that most estates pass entirely tax-free at the federal level. However, 12 states + DC impose their OWN estate tax with much lower exemptions (as low as $1M in Oregon and $2M in Massachusetts), so even non-billionaires need to plan if they live in these states.
In 2025, the One Big Beautiful Bill (OBBB) Act made the doubled TCJA exemption permanent. Previously the exemption was scheduled to revert to ~$7M per person after 2025, which would have pulled millions more middle-class estates into taxable territory. The "estate tax cliff" is now gone — but state estate taxes, the gift tax, the GST tax, and proper planning still matter for high-net-worth families.
Estate vs inheritance vs gift tax
Three closely related but distinct taxes — easy to confuse:
| Tax | Who pays | When | Federal | State |
|---|---|---|---|---|
| Estate tax | The estate (decedent) | At death | Yes (40% on amount above $13.99M) | 12 states + DC |
| Inheritance tax | The recipient | After receiving inheritance | No | 6 states (KY, MD, NE, NJ, PA, IA-phased) |
| Gift tax | The giver | When gift exceeds $19K/recipient | Yes (40% above lifetime exemption) | CT only |
Federal gift and estate taxes are "unified" — they share the same $13.99M exemption. Every dollar of taxable lifetime gifts reduces your estate exemption by the same amount. This prevents people from giving everything away during their lifetime to avoid estate tax. Annual exclusion gifts ($19K/recipient/year) don't count against the lifetime exemption.
How federal estate tax works
Federal estate tax applies to assets you own at death. Your estate gets a $13.99 million exemption in 2026 ($27.98M for married couples with portability). Anything above that is taxed at 40%. Less than 0.1% of estates owe any federal estate tax — it's a problem mostly for people with $14M+ in net worth.
Federal Estate Tax = (Taxable Estate − Exemption) × 40%
Taxable Estate = Gross Estate − Debts − Charitable − Marital Deductions
The marital deduction is unlimited — you can leave everything to a US-citizen spouse with zero estate tax. The charitable deduction is also unlimited for qualified 501(c)(3) charities. Both are powerful planning tools.
The OBBB Act of 2025 made the doubled TCJA exemption permanent, so the $13.99M figure is no longer scheduled to revert to ~$7M after 2025. It indexes annually for inflation.
Estate tax calculation example
Let's calculate the federal estate tax on a real scenario: a single person dies in 2026 with the following assets and deductions.
Estate composition:
• Real estate (primary home + vacation home): $5,000,000
• Investment portfolio (stocks, bonds): $14,000,000
• Retirement accounts (IRA + 401(k)): $3,000,000
• Business interest: $4,000,000
• Life insurance death benefit (owned by decedent): $2,000,000
• Personal property + collectibles: $500,000
Step 1 — Gross estate:
$28,500,000
Step 2 — Deductions:
• Debts (mortgages, loans): −$2,000,000
• Funeral and admin expenses: −$200,000
• Charitable bequest to alma mater: −$3,000,000
Step 3 — Taxable estate:
$28.5M − $5.2M = $23,300,000
Step 4 — Apply lifetime exemption:
$23.3M − $13.99M = $9,310,000 taxable
Step 5 — Federal estate tax (40%):
$9.31M × 40% = $3,724,000
Net to heirs: $28.5M − $5.2M deductions − $3.72M tax = $19,580,000
Effective tax rate on gross estate: 13.1%. Had this person lived in Massachusetts ($2M state exemption, 16% top rate), an additional ~$3.4M state estate tax would apply, dropping heirs' net to ~$16.2M. Estate planning (life insurance trust to remove the $2M policy, bypass trust to capture full exemption) could have reduced this further.
Gift tax + lifetime exemption
Two limits matter: the annual exclusion ($19,000 per recipient in 2026) — gifts under this never trigger any reporting — and the lifetime exemption ($13.99M), which is unified with the estate tax exemption.
Example: $50,000 gift to a single child
Annual exclusion: $19,000 (no tax, no reporting)
Excess: $31,000 — uses lifetime exemption (Form 709 required)
Tax owed: $0 (still have $13.96M of lifetime exemption left)
Married couples can split gifts — treat any gift as if half came from each spouse, doubling the annual exclusion to $38,000 per recipient. Strategically gifting up to the annual exclusion to many people every year is one of the simplest estate-reduction strategies.
Annual gifting strategies
Annual exclusion gifting is the simplest and most powerful estate-reduction tool. Each year, every person can give $19,000 to any number of recipients — completely tax-free, with no reporting. Married couples can give $38,000 per recipient (gift-splitting on Form 709, even though no tax is owed). Done over years to many people, this moves millions out of the taxable estate:
| Scenario | Per year | Over 20 years |
|---|---|---|
| Single → 1 child | $19,000 | $380,000 |
| Married → 1 child | $38,000 | $760,000 |
| Married → 3 children | $114,000 | $2,280,000 |
| Married → 3 kids + 6 grandkids + 3 in-laws | $456,000 | $9,120,000 |
| + growth on transferred assets at 7%/yr | — | ~$19,000,000 |
529 plan superfunding: A unique benefit lets you contribute up to 5 years of annual exclusion to a 529 plan in a single year — $95,000 single / $190,000 married couple per beneficiary, treated as if spread over 5 years. Combined with tax-free growth and tax-free withdrawals for education, this is one of the best estate tools.
Direct payments for tuition and medical: Tuition paid directly to an educational institution and medical expenses paid directly to a healthcare provider are NOT considered gifts (no annual exclusion limit). You can pay your grandchild's $80K Stanford tuition AND give them $19K in addition.
Gifts of appreciating assets: Gift assets that will appreciate (stock you expect to grow, real estate in growth markets) — all future appreciation occurs OUTSIDE your estate. Recipient takes your cost basis (carryover), so they'll owe capital gains when they sell. Trade-off: lose step-up basis (assets held until death get reset basis) but remove future growth from taxable estate.
State estate tax (13 states + DC)
Most states have NO separate estate tax. The exceptions: 12 states + DC each have their own exemptions (often much lower than federal) and rates.
| State | Exemption | Top Rate |
|---|---|---|
| Connecticut | $13,990,000 | 12% |
| DC | $4,873,200 | 16% |
| Hawaii | $5,490,000 | 20% |
| Illinois | $4,000,000 | 16% |
| Maine | $7,000,000 | 12% |
| Maryland | $5,000,000 | 16% |
| Massachusetts | $2,000,000 | 16% |
| Minnesota | $3,000,000 | 16% |
| New York | $7,160,000 | 16% |
| Oregon | $1,000,000 | 16% |
| Rhode Island | $1,802,431 | 16% |
| Vermont | $5,000,000 | 16% |
| Washington | $3,000,000 | 20% |
Watch out for cliffs: New York and Massachusetts can tax your entire estate (not just amount above exemption) once you cross the threshold by enough.
State inheritance tax (6 states)
Inheritance tax is paid by the recipient (not the estate) in just 6 states. Spouses are exempt everywhere; close family usually pays low or no tax; distant relatives and non-relatives pay the highest rates.
| State | Spouse / Lineal | Distant / Non-Relative |
|---|---|---|
| Iowa | Exempt | up to 0.0% |
| Kentucky | Exempt | up to 16.0% |
| Maryland | Exempt | up to 10.0% |
| Nebraska | Exempt | up to 15.0% |
| New Jersey | Exempt | up to 16.0% |
| Pennsylvania | Exempt | up to 15.0% |
Iowa fully repeals inheritance tax for deaths after Jan 1, 2025. Maryland is the only state with both estate AND inheritance tax. New Jersey and Pennsylvania have the steepest rates for non-relatives (15–16%).
Portability and DSUE for couples
Portability lets a surviving spouse use any unused exemption from the deceased spouse — called DSUE (Deceased Spouse Unused Exemption). Without it, exemptions are "use it or lose it."
Example: Spouse A dies in 2026 with $4M estate, leaves everything to Spouse B (unlimited marital deduction = $0 estate tax owed). Spouse A's $13.99M exemption is unused. With portability elected, Spouse B's effective exemption becomes $13.99M (own) + $13.99M (DSUE) = $27.98M. Without portability, Spouse B has only their own $13.99M to use.
Critical: Portability is NOT automatic. The estate's executor must file Form 706 (federal estate tax return) within 9 months of death (or 15 months with extension), even if no tax is owed. Failing to file is the #1 estate-planning error for affluent couples — losing up to $13.99M of exemption to a paperwork omission.
Portability vs Bypass Trust: portability is simpler but doesn't capture appreciation. A bypass trust (funded with first spouse's exemption at death) keeps appreciation OUT of the survivor's estate — better for assets expected to grow significantly. Portability works best for cash, liquid assets, and slow-growth holdings.
Step-up in basis at death
When you inherit appreciated assets (other than retirement accounts), your cost basis "steps up" to fair market value at the date of death. This eliminates capital gains tax on a lifetime of appreciation.
Example:
Mom buys 1,000 shares of Apple at $1 in 1990 ($1,000 basis).
Stock grows to $250/share by her death in 2026 → worth $250,000.
If she had sold during her lifetime: capital gains on $249,000 → ~$50K federal LTCG.
If she had GIFTED to you in 2020: you'd inherit her $1,000 basis, owe full capital gains when you sell.
If you INHERIT at death: basis steps up to $250,000. Sell immediately for $250K → $0 capital gains.
Implications: don't gift highly appreciated assets during your lifetime — hold until death. Gift cash or new investments instead. Exception: gifting low-basis assets to charity (charity gets full FMV deduction, donor avoids gain).
Retirement accounts (IRA, 401(k)) do NOT get a step-up — they're "income in respect of decedent" (IRD), and heirs pay ordinary income tax as they withdraw. The SECURE Act (2019) requires most non-spouse beneficiaries to empty inherited retirement accounts within 10 years.
Wills vs trusts
| Feature | Will | Revocable Trust | Irrevocable Trust |
|---|---|---|---|
| Cost to set up | $0-$500 DIY, $500-$2K attorney | $1,500-$5,000 | $3,000-$10,000+ |
| Avoids probate? | No | Yes | Yes |
| Public record? | Yes | No | No |
| Reduces estate tax? | No | No | Yes |
| Asset protection? | No | No | Yes (in many states) |
| Can change later? | Yes | Yes | No (mostly) |
Most people benefit from BOTH: a will to catch any assets not in the trust (called a "pour-over will") plus a revocable living trust as the main asset holder. High-net-worth families add irrevocable trusts (ILIT, SLAT, GRAT) on top of these for estate tax reduction.
Probate: process and avoidance
Probate is the court-supervised process of validating a will, paying debts, and distributing assets. It's public, slow (6-18 months minimum), and expensive — typically 3-7% of estate value in attorney fees, executor fees, and court costs.
Probate steps: (1) Will filed with probate court, (2) executor appointed (named in will or court-appointed), (3) notice to creditors (typically 3-6 months), (4) inventory and appraisal, (5) pay debts and taxes, (6) court approval of accounting, (7) final distribution. California probate can take 1-2 years; Florida 6-12 months; Texas often less than 6 months.
How to avoid probate:
- Revocable living trust — assets in trust bypass probate entirely. Most popular probate-avoidance tool.
- Joint tenancy with right of survivorship (JTWROS) — surviving owner takes title automatically. Common for spouses.
- Beneficiary designations — IRAs, 401(k)s, life insurance, annuities pass directly to named beneficiaries.
- Payable-on-death (POD) bank accounts — name a beneficiary; account transfers automatically.
- Transfer-on-death (TOD) brokerage and (in some states) real estate — same concept for non-retirement accounts.
- Small estate procedures — most states have simplified probate for estates under $50K-$200K.
Update beneficiary designations after major life events (marriage, divorce, birth, death). Beneficiary designations OVERRIDE your will — a will leaving everything to your kids doesn't matter if your IRA still names your ex-spouse.
Common trust types
- Revocable Living Trust (RLT): Most common. You're trustee + beneficiary while alive. Avoids probate. Doesn't reduce estate tax (assets still in your taxable estate).
- Irrevocable Life Insurance Trust (ILIT): Owns life insurance to keep death benefit OUT of taxable estate. Critical for large policies. Premiums paid via annual exclusion gifts using Crummey notices.
- Spousal Lifetime Access Trust (SLAT): Use your $13.99M exemption now while still indirectly benefiting through your spouse. Each spouse can create a SLAT for the other (must avoid "reciprocal trust doctrine").
- Grantor Retained Annuity Trust (GRAT): Transfer rapidly appreciating assets out of estate at low gift cost. You receive an annuity for a term; remainder goes to beneficiaries. "Zeroed-out GRAT" is popular for entrepreneurs and stock with high upside.
- Charitable Remainder Trust (CRT): Get income for life, leave remainder to charity. Income tax deduction, no capital gains on contributed appreciated assets, removed from estate.
- Charitable Lead Trust (CLT): Charity gets income for term, family gets remainder. Reverse of CRT. Useful when you want to fund a charity now AND minimize transfer taxes.
- Qualified Personal Residence Trust (QPRT): Removes home from estate at discount. You retain right to live in it for term (5-15 years), then home passes to family. Risk: dying during the term.
- Dynasty Trust: Multi-generational trust avoiding estate tax at each generation. Allowed in states with no Rule Against Perpetuities (DE, NV, SD, AK, WY).
- Special Needs Trust (SNT): Provides for disabled beneficiary without disqualifying them from government benefits (SSI, Medicaid).
- Bypass / Credit Shelter Trust: At first spouse's death, fund with the deceased's exemption. Trust assets aren't in survivor's estate, even if they appreciate.
Life insurance and estate tax
Life insurance you own at death is included in your taxable estate. A common pitfall: a $5M policy on a $10M estate creates a $15M taxable estate. The policy itself can push you over the exemption.
Solution: Irrevocable Life Insurance Trust (ILIT). The trust owns the policy; you (the insured) make annual exclusion gifts to the trust to pay premiums; on your death, the death benefit goes to the trust beneficiaries (your heirs) tax-free.
3-year lookback rule: If you transfer an EXISTING policy to an ILIT and die within 3 years, the death benefit is pulled back into your estate. Best practice: have the ILIT purchase a NEW policy (no lookback). If transferring existing, do it ASAP.
Crummey notices: When you make a premium-paying gift to the ILIT, the trustee sends a "Crummey letter" to beneficiaries notifying them of a temporary right to withdraw (typically 30 days). This converts the gift to a "present interest" gift eligible for the $19K annual exclusion. Beneficiaries don't actually withdraw (they understand the deal). Failing to send Crummey notices is a common ILIT failure that the IRS challenges.
10 estate planning strategies
- Annual exclusion gifting: $19K × recipients × years adds up fast. A couple gifting to 4 kids for 20 years moves $3M+ out of the estate tax-free.
- Spousal portability (DSUE): File Form 706 within 9 months of first spouse's death to preserve their unused exemption. Effectively doubles the couple's exemption to $27.98M.
- Irrevocable Life Insurance Trust (ILIT): Removes life insurance proceeds from your taxable estate. Crucial when life insurance death benefit is large enough to push your estate over the exemption.
- 529 superfunding: Front-load 5 years of annual exclusion ($95K, or $190K married) into a single 529 in one year per beneficiary. Tax-free growth + tax-free education withdrawals.
- SLAT (Spousal Lifetime Access Trust): Use your $13.99M exemption now while still benefiting indirectly through your spouse's access.
- GRAT (Grantor Retained Annuity Trust): Transfer rapidly appreciating assets out of your estate at low gift tax cost. Best for entrepreneurs and stock with high upside.
- Charitable bequests: Unlimited deduction. Combine with appreciated assets (charity gets full FMV, you avoid capital gains).
- Direct payments for tuition / medical: Pay grandchild's tuition directly to school + medical bills directly to provider — UNLIMITED, doesn't count against $19K annual exclusion.
- Move to a no-estate-tax state: If you can establish residency before death, avoid state estate tax entirely. Florida, Texas, Tennessee popular destinations.
- Hold appreciated assets until death (step-up): Don't gift highly appreciated stock during your lifetime — heirs get basis step-up, eliminating decades of unrealized gains.
⚠ Get professional help: Estate planning above the federal exemption requires a qualified estate attorney. The structures above (especially trusts) have strict rules — DIY can backfire badly. A few thousand in legal fees can save millions in taxes.
10 common estate planning mistakes
- No will or outdated will. Dying intestate forces state law to decide who inherits. Outdated wills (no kids → kids; new spouse not added; ex-spouse never removed) cause family conflict.
- Beneficiary designations not updated. Old IRA / 401(k) / life insurance beneficiaries trump your will. Ex-spouses still listed = they get the money.
- Failing to file Form 706 for portability. Even when no tax is owed at first spouse's death, file 706 to preserve up to $13.99M of exemption.
- Owning life insurance personally. The death benefit gets included in your taxable estate. Use an ILIT for large policies.
- Gifting appreciated assets while alive. Heir loses step-up basis. Holding until death is usually better tax-wise (unless you need to move asset out of taxable estate ASAP).
- Joint accounts with adult children. Adds your child as a co-owner — exposed to their creditors, divorces, lawsuits. Pours assets into their estate too.
- No durable power of attorney or healthcare directive. If you become incapacitated, family must petition court for guardianship — slow, expensive, public.
- Forgetting about digital assets. Crypto, online businesses, password-protected accounts can be lost forever without a digital estate plan.
- Not telling family where documents are. A perfect estate plan in a fireproof safe nobody can find = useless. Tell executor and a backup person.
- Treating estate planning as one-time. Update every 3-5 years and after major life events: marriage, divorce, birth, death, large windfall, move to new state.
Essential estate planning documents
Every adult should have these five documents (regardless of net worth):
- Last Will and Testament: Distributes assets at death, names guardian for minor children, names executor. Must be signed and witnessed per state law (usually 2 witnesses; some states allow holographic/handwritten wills).
- Revocable Living Trust: For most middle-class+ Americans. Avoids probate, maintains privacy, allows easy management if you become incapacitated. Coupled with a "pour-over will" to catch any assets left out.
- Durable Power of Attorney (Financial): Authorizes someone to handle your finances if you're incapacitated. "Durable" means it survives your incapacity. Without it, family must seek court-appointed guardianship.
- Healthcare Power of Attorney + Living Will (Advance Directive): Authorizes someone to make medical decisions for you, and states your wishes (life support, DNR, organ donation). State-specific forms; available free online.
- HIPAA Release: Allows your healthcare agent and family to access your medical information. Often bundled with the healthcare power of attorney.
Add for high-net-worth families: Irrevocable trusts (ILIT, SLAT, GRAT, dynasty), business succession plan, prenuptial/postnuptial agreement (asset protection), charitable trusts, GST exemption allocation.
DIY options ($0-$500): Trust & Will (trustandwill.com), LegalZoom, Nolo's Quicken WillMaker. Estate attorney ($1,500-$5,000+): Recommended for net worth over $1M, blended families, business owners, or anyone with complex assets.
Estate planning glossary
- Decedent
- The person who has died. The estate is theirs.
- Beneficiary
- A person or entity who receives assets from an estate, trust, or insurance policy.
- Executor (Personal Representative)
- The person named in the will to administer the estate. Files probate, pays debts, distributes assets.
- Trustee
- The person or institution managing a trust on behalf of beneficiaries. Has fiduciary duty.
- Grantor (Settlor / Trustor)
- The person who creates and funds a trust.
- Probate
- Court process for validating a will and distributing assets. Public, slow, costs 3-7% of estate.
- Intestate
- Dying without a valid will. State law decides who inherits.
- Lifetime Exemption
- The total amount you can transfer (during life or at death) federal-tax-free. $13.99M in 2026.
- Annual Exclusion
- The amount you can gift to any individual each year tax-free. $19K in 2026.
- DSUE
- Deceased Spouse's Unused Exemption. Portable to surviving spouse via Form 706.
- Stepped-up Basis
- Inherited assets reset to fair market value at death — eliminating all unrealized capital gains.
- IRD (Income in Respect of Decedent)
- Inherited retirement accounts (IRA, 401(k)) — heirs pay ordinary income tax. No step-up.
- Marital Deduction
- Unlimited transfers to a US-citizen spouse without estate or gift tax.
- Crummey Power
- Beneficiary's temporary right to withdraw a trust contribution. Converts gifts to "present interest" for the annual exclusion.
- GST Tax
- Generation-Skipping Transfer Tax — 40% on transfers to grandchildren or persons 37.5+ years younger. Separate $13.99M exemption.
- ILIT
- Irrevocable Life Insurance Trust. Owns life insurance to keep death benefit out of taxable estate.
- SLAT
- Spousal Lifetime Access Trust. Use exemption now while indirectly accessing assets via spouse.
- GRAT
- Grantor Retained Annuity Trust. Transfer appreciation out of estate at low gift cost.
- QPRT
- Qualified Personal Residence Trust. Removes home from estate at IRS-discounted gift value.
- Form 706
- Federal Estate Tax Return. Required for taxable estates and to elect portability.
- Form 709
- Federal Gift Tax Return. Required for gifts above the annual exclusion.
Frequently asked questions
What's the federal estate tax exemption in 2026?
$13.99 million per individual ($27.98 million per married couple with portability). The OBBB Act of 2025 made the doubled TCJA exemption permanent — it was previously set to revert to ~$7M after 2025. Above the exemption, estates pay 40% federal tax. Less than 0.1% of estates owe federal estate tax in any given year.
What's the difference between estate tax and inheritance tax?
Estate tax is paid by the deceased person's estate before assets are distributed — comes out of the estate's value. Inheritance tax is paid by the recipient after they receive the inheritance — based on the amount they receive AND their relationship to the deceased. The federal government has only an estate tax (no inheritance tax). Five states have inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. (Iowa fully repealed its inheritance tax for deaths on or after January 1, 2025.) Maryland uniquely has both estate AND inheritance tax.
How much can I gift each year without filing taxes?
$19,000 per recipient per year (2026 annual exclusion) — no reporting required. A married couple can give $38,000 per recipient by splitting gifts. There's no limit on the number of recipients: you can give $19K to each of 100 different people = $1.9M tax-free per year. Gifts above the annual exclusion to a single recipient must be reported on Form 709 but don't trigger tax until you exhaust your $13.99M lifetime exemption.
What's the lifetime gift exemption?
$13.99 million in 2026 — the same number as the estate tax exemption (they're 'unified'). Every dollar of taxable gifts you make during your lifetime reduces your estate tax exemption by the same amount. For example, if you give $1M to a child above the annual exclusion in 2026, you've used $1M of your lifetime exemption — your estate exemption drops to $12.99M when you die.
Are gifts to spouses taxable?
No — the unlimited marital deduction allows you to give any amount to a US-citizen spouse with no gift tax. Gifts to a non-US-citizen spouse are limited to a higher annual exclusion ($190,000 in 2026). Same applies at death (unlimited transfers to a US-citizen spouse, no estate tax).
What about gifts to charity?
Unlimited deduction — no estate or gift tax on transfers to qualified 501(c)(3) charities. You may also get an income tax deduction in the year of the gift (up to 60% of AGI for cash gifts to public charities, less for other categories). A common estate planning move: leave appreciated assets to charity and cash to family.
Which states have estate tax in 2026?
12 states + DC: Connecticut ($13.99M exemption), Hawaii ($5.49M), Illinois ($4M), Maine ($7M), Maryland ($5M), Massachusetts ($2M), Minnesota ($3M), New York ($7.16M), Oregon ($1M), Rhode Island ($1.8M), Vermont ($5M), Washington ($3M, 20% top rate — highest), and DC ($4.87M). Each is independent of federal — you can owe state estate tax even if you owe nothing federally.
What is the New York estate tax 'cliff'?
New York has a unique rule: if your taxable estate exceeds 105% of the exemption ($7.16M × 1.05 = $7.52M in 2026), you LOSE the entire exemption and are taxed on the whole estate. This creates a sharp cliff where a $7.52M estate pays no NY tax, but a $7.53M estate suddenly owes hundreds of thousands. Estate planners often use bequests or trusts to keep estates just under the cliff.
What is portability / DSUE?
Portability lets a surviving spouse use any unused exemption from the deceased spouse — called DSUE (Deceased Spouse Unused Exemption). Without portability, if Spouse A dies with no taxable estate, their $13.99M exemption is lost. With portability (elected on Form 706), Spouse B can use both their own exemption and Spouse A's DSUE — effectively $27.98M total exemption. You must file Form 706 within 9 months of death (or 15 with extension) to elect portability, even if no tax is owed.
What's stepped-up basis at death?
When you inherit assets, your cost basis 'steps up' to the fair market value at the date of death (or 6 months later if the executor elects an alternate valuation date). This eliminates capital gains tax on appreciation during the decedent's lifetime. Example: parent buys stock for $50K; it's worth $500K at their death; you sell immediately for $500K → $0 capital gains. If they had gifted you the stock instead, you'd inherit their $50K basis and owe tax on the $450K gain.
How can I reduce estate tax legally?
Strategies include: (1) Annual gifting up to the exclusion ($19K × number of recipients × number of years), (2) 529 superfunding (up to 5 years of annual exclusion contributed in one year), (3) Irrevocable Life Insurance Trust (ILIT) — keeps insurance proceeds out of taxable estate, (4) Spousal Lifetime Access Trust (SLAT), (5) Grantor Retained Annuity Trust (GRAT) for appreciating assets, (6) Charitable Remainder Trust (CRT), (7) Family Limited Partnership (FLP) for valuation discounts. Most strategies need to be set up well in advance with a qualified estate attorney.
What is the Generation-Skipping Transfer (GST) tax?
A separate 40% federal tax on transfers that 'skip' a generation — typically gifts/bequests to grandchildren or anyone more than 37.5 years younger (and not a spouse). The GST exemption is $13.99M (separate from estate exemption). It exists to prevent families from avoiding estate tax by skipping generations. Direct skips through a trust may be subject to GST tax unless the GST exemption is allocated.
Do I need a will if I'm not wealthy?
Yes — every adult should have a will, regardless of wealth. Without one (intestate), state law decides who inherits, who raises minor children, and how assets are distributed. This often produces results the deceased wouldn't want: unmarried partners get nothing, estranged relatives may inherit, and probate takes longer. A simple will costs $0-$500 (LegalZoom, Trust & Will, attorney). Pair with a healthcare directive, durable power of attorney, and HIPAA release.
What's the difference between a will and a trust?
A WILL: directs distribution of assets at death; goes through probate (public, costs 3-7% of estate, takes 6-18+ months); doesn't avoid estate tax. A TRUST: a separate legal entity holding assets; bypasses probate (private, faster); some types reduce estate tax. Revocable living trusts are popular for probate avoidance. Irrevocable trusts (ILIT, SLAT, GRAT, dynasty) are used for estate tax reduction. Most people benefit from BOTH a will (catching assets not in trust) and a revocable trust (the main asset holder).
What goes through probate vs avoids it?
PROBATE assets: solely-owned property, assets without beneficiaries (like a bank account in your name only). NON-PROBATE assets (skip probate): joint tenancy property (spouse, JTWROS), retirement accounts with beneficiaries (IRA, 401(k)), life insurance with beneficiaries, payable-on-death (POD) bank accounts, transfer-on-death (TOD) brokerage accounts, assets in revocable living trusts. Strategy: name beneficiaries on EVERYTHING — accounts, life insurance, retirement plans — and use TOD/POD designations to bypass probate.
How does life insurance interact with estate tax?
Life insurance death benefit you OWN at death is included in your taxable estate. A $5M policy on a $13M estate pushes the estate to $18M — owing tax on $4M. Solution: an Irrevocable Life Insurance Trust (ILIT). The ILIT owns the policy; pays the premium with annual exclusion gifts; receives the death benefit estate-tax-free. Crucial 3-year lookback rule: transferring an existing policy to an ILIT requires you to live 3 years for the transfer to remove it from your estate.
What is a Crummey power and why does it matter for ILITs?
A Crummey power gives ILIT beneficiaries a temporary right to withdraw contributions (typically 30 days). This converts what would be a 'future interest' gift (not eligible for the annual exclusion) into a 'present interest' gift (eligible). Without it, premium payments can't use the $19K annual exclusion. The trustee sends a 'Crummey letter' to beneficiaries each year notifying them of the right to withdraw — but they don't (usually). Mismanaging Crummey notices is a common reason ILITs fail in audits.
How can married couples maximize the estate exemption?
Three approaches: (1) PORTABILITY — file Form 706 at first death to preserve the deceased spouse's unused exemption (DSUE); allows survivor to use both. Simplest. (2) BYPASS / CREDIT-SHELTER TRUST — at first death, fund a trust with one spouse's exemption ($13.99M); rest goes to surviving spouse; trust assets aren't in survivor's estate, even if they grow. Better than portability for appreciating assets. (3) AB or QTIP TRUSTS — combine bypass + marital deduction with control. Typically need an estate attorney to set up properly.
What is a step-up in basis and why is it valuable?
When you inherit assets (other than IRA/401k), the cost basis 'steps up' to the fair market value at the date of death. This eliminates capital gains tax on appreciation during the decedent's lifetime. Example: parent buys stock at $50K, dies when worth $500K. You sell for $500K → $0 capital gains. Had they GIFTED you the stock during their lifetime, you'd inherit their $50K basis and owe tax on the $450K gain when you sold. Implication: hold appreciated assets until death; gift cash or new investments instead.
What about retirement accounts (IRA/401k) inherited?
Inherited IRAs and 401(k)s do NOT get a step-up in basis. They're 'income in respect of decedent' (IRD): heirs pay ordinary income tax as they withdraw. The SECURE Act (2019) requires most non-spouse beneficiaries to empty inherited retirement accounts within 10 years (no more 'stretch IRA'). Spouses can roll into their own IRA and continue tax-deferred growth. Strategies: convert traditional IRA to Roth during the owner's lifetime to pre-pay tax at potentially lower rates and leave heirs tax-free Roth funds.
Do I have to report large gifts received?
Generally no — recipients don't owe US gift tax on gifts received (only the giver may). Exceptions: (1) Gifts from foreign persons exceeding $100K in a year require Form 3520 reporting (penalty for non-filing: 5%/month, up to 25%). (2) Gifts from foreign corporations exceeding ~$19K (indexed) also require Form 3520. (3) Receiving over $100K from any single foreign source triggers reporting. The receiver doesn't pay tax, but failure to file Form 3520 carries severe penalties.
What happens to the estate exemption after 2025?
The OBBB Act (One Big Beautiful Bill, signed July 2025) made the doubled TCJA exemption permanent. Previously, the exemption was scheduled to revert to ~$7M after Dec 31, 2025. Now it stays at $13.99M (2026) and continues indexing for inflation. This eliminated the rush to use exemptions before sunset. However, future Congresses can change the law again — high-net-worth families should still consider locking in current exemptions through gifts and SLATs while political certainty exists.
Can I disclaim an inheritance?
Yes — within 9 months of the decedent's death (and before accepting any benefits), you can disclaim (refuse) part or all of an inheritance. The asset then passes as if you predeceased the decedent — usually to your children or contingent beneficiaries. Reasons to disclaim: (1) you don't need the money and want it to pass to children for tax efficiency, (2) the inheritance pushes you into a higher tax bracket, (3) you want to redirect to a trust for asset protection. Must follow IRC §2518 strict requirements; consult an attorney.
What's a Qualified Personal Residence Trust (QPRT)?
A QPRT removes your home from your taxable estate at a discount. You transfer the home to an irrevocable trust, retaining the right to live in it for a term (typically 5-15 years). At trust end, the home passes to beneficiaries (usually children). The IRS values your gift at less than full market value (using IRS interest rate tables), saving exemption. Risk: if you die during the term, the home returns to your estate. After the term, you can rent the home from the new owners (your kids) at fair market value to keep living there.