For most Americans, the federal estate tax is not a concern — but for those with significant wealth, it can claim up to 40% of assets transferred at death. Even if your estate falls below the taxable threshold, understanding the gift tax, step-up in basis, and planning strategies can help you pass more wealth to your heirs and less to the IRS.
The Federal Estate Tax: Who It Affects in 2025 and 2026
The federal estate tax applies to the taxable estate of a deceased person — the fair market value of everything they owned at death, minus liabilities and deductions. The current federal estate tax rate is a flat 40% on the taxable amount above the exemption.
The 2025 and 2026 Estate Tax Exemption
| Year | Per-person exemption | Married couples (portability) |
|---|---|---|
| 2024 | $13,610,000 | $27,220,000 |
| 2025 | $13,990,000 | $27,980,000 |
| 2026 | $15,000,000 (OBBBA permanent) | $30,000,000 |
Only estates exceeding this amount owe any federal estate tax.
What OBBBA changed: The 2017 Tax Cuts and Jobs Act elevated exemption was set to sunset after 2025, reverting to roughly $7 million per person (adjusted for inflation). The One, Big, Beautiful Bill Act (OBBBA), signed July 2025, made a $15 million per-person base exemption permanent starting 2026, indexed for inflation thereafter. The 2026 sunset no longer applies, so the “use it or lose it” urgency that dominated 2024–2025 estate planning advice is now gone.
Estate Tax Calculation Example (2026)
| Item | Amount |
|---|---|
| Gross estate (investments, real estate, retirement accounts, life insurance) | $18,000,000 |
| Debts and funeral expenses | –$200,000 |
| Charitable bequests | –$500,000 |
| Adjusted taxable estate | $17,300,000 |
| Estate tax exemption (2026) | –$15,000,000 |
| Taxable amount | $2,300,000 |
| Federal estate tax owed (40%) | $920,000 |
Fewer than 1% of estates owe federal estate tax under current law — but state estate taxes apply at lower thresholds in 12 states plus Washington D.C.
The Annual Gift Tax Exclusion
You can give any individual up to $19,000 in 2025 (up from $18,000 in 2024) without triggering any gift tax reporting. This is the annual gift tax exclusion, and it resets every calendar year.
- A married couple can give $38,000 per recipient per year using gift-splitting
- You can give $19,000 each to as many people as you want — there is no limit on the number of recipients
- Gifts below this threshold do not reduce your lifetime estate/gift tax exemption
Example: A married couple with four adult children and eight grandchildren can give $38,000 to each of the twelve — transferring $456,000 per year completely tax-free.
Gifts That Are Always Tax-Free
Regardless of amount, these transfers are never subject to gift tax:
- Direct tuition payments to educational institutions (paid directly to the school)
- Direct medical expense payments (paid directly to the provider)
- Gifts between spouses (who are US citizens) — unlimited
The Unlimited Marital Deduction
Assets transferred between spouses — either during life or at death — qualify for an unlimited marital deduction, meaning no estate or gift tax is owed regardless of the amount, as long as the recipient spouse is a US citizen.
This means a married couple can defer all estate tax until the death of the surviving spouse. However, without planning, the surviving spouse’s estate may face a larger tax burden. This is where portability and credit shelter trusts become important.
Portability: Preserving Both Exemptions
The portability election allows a surviving spouse to claim the unused estate tax exemption of their deceased spouse. If the first spouse dies in 2026 with $6 million in their estate and an exemption of $15 million, the unused $9 million exemption can be transferred to the surviving spouse — giving them up to $24 million in combined exemption.
Portability must be elected on a timely filed estate tax return (Form 706) — even if no estate tax is owed. The deadline is 9 months after death (or 15 months with an extension). Missing this election forfeits the unused exemption permanently.
Key Estate Planning Strategies
1. Annual Gifting Program
Systematic gifting under the $19,000 annual exclusion removes assets from your estate without using any lifetime exemption. Over 10 years, a married couple with four children could remove $3.04 million from their estate tax-free ($38,000 × 4 children × 10 years = $1.52 million, doubled for gifts to spouses of children, etc.).
2. 529 Plan Superfunding
You can front-load five years of annual exclusion gifts into a 529 college savings plan in a single year — $95,000 per beneficiary ($190,000 for couples) in 2025. No additional gifts to that beneficiary are allowed for five years, but the money grows tax-free for education.
3. Irrevocable Life Insurance Trust (ILIT)
Life insurance proceeds are included in your estate if you own the policy. An ILIT owns the policy instead, keeping proceeds outside your estate. The trust can use those proceeds to pay estate taxes or provide liquidity to heirs, allowing other assets (a family business, real estate) to pass intact.
4. Charitable Remainder Trust (CRT)
You transfer appreciated assets to the CRT, receive an income stream for life (or a term of years), get a partial charitable deduction upfront, and avoid immediate capital gains tax on the sale. At death, the remainder passes to charity. This strategy works well for donors with highly appreciated stock or real estate.
5. Grantor Retained Annuity Trust (GRAT)
You transfer assets to a GRAT, receive an annuity back for a fixed term, and if the assets grow faster than the IRS interest rate (the Section 7520 rate), the excess passes to heirs estate-tax-free. GRATs work best in low-interest-rate environments and when assets are expected to appreciate rapidly.
The Step-Up in Basis: A Powerful Benefit for Heirs
Assets inherited at death receive a step-up in cost basis to their fair market value on the date of death. If you bought stock for $10,000 that is now worth $100,000, your heir inherits it with a $100,000 basis — and can sell it immediately with zero capital gains tax.
This makes holding appreciated assets until death more tax-efficient than gifting them during your lifetime. Gifts carry over your original cost basis (a “carryover basis”), meaning the recipient inherits your embedded gain.
State Estate Taxes
Twelve states and Washington D.C. impose their own estate taxes, often with much lower exemptions than the federal level:
| State | Exemption (approx.) | Top Rate |
|---|---|---|
| Oregon | $1,000,000 | 16% |
| Massachusetts | $2,000,000 | 16% |
| Washington | $2,193,000 | 20% |
| New York | $7,160,000 | 16% |
| Connecticut | $13,610,000 | 12% |
If you live in a state with an estate tax, the planning strategies above apply to both federal and state-level tax.
Key Takeaway
Federal estate tax affects very few estates under the 2025 exemption of $13.99 million, and under OBBBA (signed July 2025) the exemption rises to $15 million per person in 2026 and is permanently indexed thereafter — so the previously feared “TCJA sunset” reduction to roughly $7 million no longer applies. Annual gifting, portability elections, life insurance trusts, and the step-up in basis are all tools worth understanding now. Work with an estate planning attorney to determine which strategies apply to your situation — the cost of planning is almost always far less than the tax savings it produces.