The federal estate tax — sometimes called the "death tax" — applies to large estates when assets pass at death. For most Americans, it doesn't apply at all. But with a potential major change on the horizon in 2026, understanding the exemption is important for anyone doing estate planning.
How the Federal Estate Tax Works
The federal estate tax is imposed on the value of a person's "gross estate" at death — essentially everything they own or have certain interests in — above the applicable exemption amount. The gross estate includes real estate, bank and investment accounts, retirement accounts (in many cases), life insurance proceeds (if the deceased owned the policy), business interests, and other assets.
The estate tax rate on amounts above the exemption is 40%. However, because of the high exemption amount, the vast majority of American estates — over 99% — owe no federal estate tax at all.
The Exemption Amount
The exemption is the amount of an estate that passes to heirs completely free of federal estate tax:
- 2025: $13.99 million per individual; $27.98 million per married couple (using portability)
- Scheduled 2026 sunset: approximately $7 million per individual; $14 million per married couple
The current high exemption was established by the Tax Cuts and Jobs Act of 2017 with a built-in expiration at the end of 2025. Congressional action to extend or make the higher exemption permanent is possible but uncertain. Anyone with a taxable estate above $7 million should be planning for the potential sunset now.
The Unlimited Marital Deduction
Assets passing from one US citizen spouse to another are entirely exempt from federal estate and gift tax — there is no limit. This is called the unlimited marital deduction. It means large estates can pass between spouses at death without immediate estate tax liability.
The critical caveat: the marital deduction defers the tax, it doesn't eliminate it. When the surviving spouse dies, their estate will be taxed on the combined assets above their available exemption. Proper planning ensures both spouses' exemptions are fully utilized.
Portability: Using Both Spouses' Exemptions
The portability election allows the surviving spouse to use any unused exemption from the first spouse's estate. This effectively gives married couples a combined exemption of up to $27.98 million (at 2025 levels) — without requiring the complex trust structures that were previously necessary to preserve both exemptions.
Action required: To elect portability, an estate tax return (Form 706) must be filed within 9 months of the first spouse's death, even if no estate tax is owed. Many families skip this filing because no tax is due — and lose the portability election as a result. File the return to preserve this option.
Strategies for Estates Above the Exemption
For estates that may exceed the applicable exemption, estate planning strategies can significantly reduce exposure:
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 the proceeds out of your taxable estate while still providing funds to your heirs or to pay estate taxes.
Gifting during lifetime
The annual gift tax exclusion ($18,000 per recipient in 2024) allows you to give away assets during your lifetime without using estate or gift tax exemption. Over time, this "chips away" at a taxable estate. Gifts above the annual exclusion use lifetime gift tax exemption (unified with the estate tax exemption).
Spousal Lifetime Access Trust (SLAT)
An irrevocable trust funded during the grantor's lifetime that allows the grantor's spouse to access trust funds, while removing the assets from the grantor's taxable estate. Useful for locking in the current high exemption before the 2026 sunset.
Charitable giving
Charitable bequests are deductible from the gross estate — reducing the taxable estate dollar for dollar. Charitable Remainder Trusts and Charitable Lead Trusts can provide income to family members while reducing estate tax exposure.
State Estate Taxes
Twelve states and the District of Columbia impose their own estate taxes, often with lower exemptions than the federal level. Washington state's exemption is $2.193 million; Oregon's is $1 million. If you live in or own property in one of these states, state estate tax planning is also relevant even if your estate is well below the federal exemption.
States with estate taxes: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and DC.