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U.S. Estate and Gift Tax Exemptions and Tax Rates

The federal exemption (formally the basic exclusion amount) and top rate have changed many times. The 2017 Tax Cuts and Jobs Act roughly doubled the exemption from 2018, and the 2025 law known as the One Big Beautiful Bill Act set it at $15 million for 2026, indexed for inflation in later years. A married couple can shield twice that amount using portability.

Estate Tax

The federal estate tax is a tax on the transfer of property at death. It is calculated on the fair market value of everything the deceased owned or had an interest in, minus allowable deductions, and it is paid by the estate before assets pass to heirs. Because the exemption is so large, very few estates owe it: in recent years only a few thousand estates a year, well under 1% of deaths, have paid any federal estate tax.

The estate tax is unified with the gift tax. Large gifts made during life use up part of the same lifetime exemption that would otherwise shelter the estate, so you cannot avoid the tax simply by giving everything away before death. Gifts up to the annual exclusion, $19,000 per recipient in 2025 and 2026, do not count against the exemption, nor do gifts to a US-citizen spouse, payments made directly for someone's tuition or medical bills, or gifts to charity.

Two features protect married couples. The unlimited marital deduction lets a person leave any amount to a surviving spouse who is a US citizen, free of estate tax. And portability lets the surviving spouse add the deceased spouse's unused exemption to their own, if the executor files an estate tax return (Form 706) to elect it, even when no tax is owed.

An estate tax return is due nine months after death, with a six-month extension available for filing (but not for paying). A dozen states and the District of Columbia levy their own estate taxes, often with exemptions far below the federal amount, such as $1 million in Oregon and $2 million in Massachusetts.

Inheritance Tax

An inheritance tax is charged to the people who receive property, not to the estate. There is no federal inheritance tax, but as of 2025 five states levy one: Pennsylvania, New Jersey, Kentucky, Nebraska and Maryland. Iowa phased its inheritance tax out for deaths on or after January 1, 2025. Maryland is the only state with both an estate tax and an inheritance tax.

Inheritance tax rates depend on the heir's relationship to the deceased. Surviving spouses are exempt in every state that has the tax, and children and other direct descendants are usually exempt or pay low rates. Siblings, nieces, nephews, friends and other more distant beneficiaries typically pay the highest rates, which can reach 15% or more. In Pennsylvania, for example, children pay 4.5% and siblings 12%, while unrelated heirs pay 15%. The tax generally depends on where the deceased lived or where real estate is located, not where the heir lives.

Money received as an inheritance is generally not federal taxable income for the heir. Income later earned on inherited property, such as interest or rent, is taxable, and withdrawals from an inherited traditional IRA or 401(k) are taxed as ordinary income.

Determining Taxable Value of an Estate

The calculation starts with the gross estate: the fair market value at death of all property, including real estate, investment and bank accounts, retirement plans, business interests, vehicles and personal belongings, life insurance the deceased owned, and their share of jointly held property. The executor may choose to value assets six months after death instead (the alternate valuation date) if that lowers both the estate's value and the tax.

Next, subtract deductions: debts such as mortgages and credit cards, funeral costs, estate administration expenses like legal and executor fees, state estate or inheritance taxes, bequests to charity, and everything left to a US-citizen spouse. The result is the taxable estate. Taxable gifts made after 1976 are added back, the unified rate schedule is applied, and the credit for the exemption amount is subtracted.

Estate tax = Tentative tax(Taxable estate + Lifetime gifts) − Tentative tax($15,000,000)

Taxable estate

gross estate minus debts, expenses, charitable gifts and state death taxes

Tentative tax

the unified rate schedule: 18% on the first $10,000, rising to 40% above $1 million

Subtracting the tentative tax on the exemption is the applicable credit; it makes the effective rate 40% on every dollar above the exemption.

Reducing Estate Tax

People with estates near or above the exemption have several well-established ways to shrink the taxable amount. Most involve moving assets, or their future growth, out of the estate while the owner is alive.

• Annual exclusion gifts. Each person can give $19,000 a year (2025 and 2026) to any number of people without using any exemption. A couple with three children and their spouses could move $228,000 a year this way.
• Paying tuition and medical costs directly. Payments made straight to a school or medical provider are excluded from gift tax without limit.
• Charitable giving. Bequests to charity are fully deductible. Charitable remainder trusts provide income during life with the remainder going to charity, and charitable lead trusts do the reverse.
• Using portability. Filing Form 706 when the first spouse dies preserves the unused exemption for the survivor.
• Irrevocable life insurance trusts (ILITs). Insurance proceeds are part of the estate if you own the policy. Having a trust own it keeps the payout out of the estate.
• Grantor retained annuity trusts (GRATs). Assets go into a trust that pays you an annuity for a term, and growth above an IRS-set rate passes to heirs largely free of gift tax.
• Family limited partnerships and LLCs. Interests in family businesses or investments can be valued at a discount for lack of control and marketability when gifted.
• Spousal lifetime access trusts (SLATs). One spouse gifts assets to a trust for the other, using exemption while keeping indirect access to the funds.
• Qualified personal residence trusts (QPRTs). A home is transferred to a trust while you keep living in it for a term, freezing its value for gift tax purposes.

Estate Planning

Estate planning is about far more than taxes. It is the process of deciding who receives your property, who manages your affairs if you cannot, and who cares for your children, and putting those decisions in legally binding documents. Without a plan, state intestacy laws decide who inherits, and a court appoints guardians and administrators, often at more cost and delay than necessary.

A will is the foundation. It names beneficiaries for property that passes through probate, appoints an executor to handle the estate, and nominates guardians for minor children. Wills become public during probate, the court-supervised process of proving the will, paying debts and distributing assets, which can take months to years and cost a few percent of the estate in some states.

A revocable living trust holds assets during life, lets you manage them as trustee, and passes them to beneficiaries at death without probate. Trusts also provide privacy and continuity if you become incapacitated. Assets must be retitled into the trust's name for it to work, and a short pour-over will catches anything left out.

Many assets bypass both wills and trusts. Retirement accounts and life insurance go to the beneficiaries named on their forms, and many bank and brokerage accounts allow payable-on-death or transfer-on-death designations. Keeping these designations up to date after marriage, divorce, births and deaths is one of the simplest and most important planning steps, because they override what a will says.

Planning also covers incapacity. A durable financial power of attorney names someone to handle money and property if you cannot, and a healthcare power of attorney with a living will names a decision-maker for medical care and records your wishes. A HIPAA authorization lets family members obtain medical information.

A sound plan typically includes:

• A will, with an executor and guardians for minor children.
• A revocable living trust, if avoiding probate or managing assets for heirs matters.
• Current beneficiary designations on retirement plans, insurance and accounts.
• Durable financial and healthcare powers of attorney and a living will.
• An inventory of assets, accounts, passwords and key contacts for your executor.
• A review every few years and after major life events or changes in tax law.

Frequently asked questions

Sources

• IRS – Estate Tax
• IRS – Gift Tax
• IRS – Form 706 instructions