Estate Tax, Gift Tax & What Your Family Actually Owes

Let me save you a lot of anxiety right up front: most American families will never owe a single dollar in federal estate tax. Not one cent. The current federal exemption is $13.99 million per individual — meaning a married couple can pass nearly $28 million to their heirs before the federal government takes a cut.

So why does everyone worry about estate taxes? Because the rules are genuinely confusing, the exemption is about to change dramatically, and — here’s the part that catches people — 17 states have their own estate or inheritance taxes with much lower thresholds. Your parents might owe nothing to the IRS and still owe tens of thousands to their state.

When my parents met with their estate planning attorney, they walked in convinced they were going to lose half their estate to taxes. They walked out relieved — but also surprised at how much they didn’t know about how estate taxes actually work. This guide is everything we learned, stripped of the jargon and the fear-mongering that makes this topic harder than it needs to be.

Federal Estate Tax: The Basics

The federal estate tax is a tax on the transfer of property at death. It applies to the total value of everything a person owned when they died — their house, bank accounts, investments, life insurance proceeds, retirement accounts, business interests, even personal property — minus debts, funeral expenses, and certain deductions.

But here’s the critical number: the federal estate tax exemption for 2026 is $13.99 million per person. That means an individual can pass up to $13.99 million to their heirs completely tax-free. A married couple, using something called portability, can effectively shield $27.98 million.

If the estate is below that threshold — and the vast majority of American estates are — there is zero federal estate tax. None. The exemption covers everything.

What happens above the exemption?

For estates that exceed the exemption, the federal estate tax rate is 40% on the amount above the threshold. So if an individual dies with an estate worth $15 million in 2025, the taxable amount is $1.01 million ($15M minus $13.99M), and the tax would be approximately $404,000.

That’s a significant number — but it only applies to a tiny fraction of estates. The IRS reports that fewer than 1% of all deaths result in a taxable estate. For context, roughly 2,500 to 3,000 estates per year actually owe federal estate tax out of approximately 2.8 million deaths annually.

Portability: How married couples double the exemption

When one spouse dies, any unused portion of their exemption can transfer to the surviving spouse. This is called portability. If the first spouse to die used none of their $13.99 million exemption, the surviving spouse now has a combined exemption of $27.98 million.

There’s one catch: portability isn’t automatic. The executor must file an estate tax return (IRS Form 706) for the deceased spouse, even if no tax is owed, to “elect” portability. If they don’t file, the unused exemption is lost. This is one of those details that an estate planning attorney handles — but it’s worth knowing about, especially if your parents have significant assets.

The 2026 Sunset: Why This Matters Right Now

Why does this matter? Because at $7 million per person ($14 million per couple), the exemption captures a much larger group of families — particularly those with significant real estate, a family business, or retirement savings that have grown over decades. A family that’s well below the current threshold might suddenly be above the new one.

What should your family do? This isn’t a reason to panic, but it is a reason to plan. If your parents’ estate is in the $5-14 million range, the sunset could meaningfully affect their planning. An estate planning attorney can walk through strategies — such as gifting, irrevocable trusts, or charitable planning — that lock in the higher exemption before it potentially drops. For estates well below $7 million, the sunset won’t change anything at the federal level.

We’ll update this section as Congress takes action (or doesn’t). Check your state guide for the most current information.

State Estate Taxes: The Part That Actually Surprises People

Here’s where it gets real for a lot more families. While the federal exemption is nearly $14 million, 12 states and the District of Columbia have their own estate taxes with much lower exemptions — some as low as $1 million.

If your parents live in one of these states, they could owe state estate tax even though they owe nothing to the IRS.

Exemption amounts are adjusted periodically. Check your state guide for current figures. Table reflects 2025 values where available.

Oregon and Massachusetts have the lowest exemptions in the country. In Oregon, an estate worth just over $1 million could trigger state estate tax. In Massachusetts, the threshold is $2 million — and in high-cost-of-living areas like Greater Boston, a modest home plus retirement savings can push a family over that line.

New York has an additional wrinkle: the “cliff.” If a New York estate exceeds the exemption by more than 5%, the entire estate becomes taxable — not just the amount above the exemption. An estate worth $7.29 million (just 5% over the $6.94 million exemption) would see the full estate subject to tax. This is one of the most aggressive estate tax structures in the country.

If your parents live in a state with its own estate tax, state-level planning becomes critically important — even if the federal tax is irrelevant. An estate planning attorney in their state will know the strategies that work.

State Inheritance Taxes: A Different Animal

Don’t confuse estate tax with inheritance tax — they’re different, and some families owe both.

• Estate tax is paid by the estate before assets are distributed. It’s based on the total value of what the deceased person owned.
• Inheritance tax is paid by the person who inherits. It’s based on how much each beneficiary receives — and the rate usually depends on the beneficiary’s relationship to the deceased.

Six states currently have inheritance taxes:

A few things to notice:

• Spouses are always exempt. No state charges inheritance tax on transfers between spouses.
• Children are often exempt too — except in Nebraska and Pennsylvania, where children do pay (though at lower rates than more distant relatives).
• The highest rates hit non-relatives and distant relatives. A friend, a nephew, or a charitable bequest to a non-qualified organization could face 10-16% inheritance tax.
• Maryland is the only state with both an estate tax AND an inheritance tax. Maryland families can face a double layer of transfer taxes.
• Iowa is phasing out its inheritance tax entirely — it was fully repealed effective January 1, 2025.

If your parents live in one of these states, inheritance tax planning is a real consideration — especially for non-spouse beneficiaries. Your state guide breaks down the specific rates and exemptions for each state.

Gift Tax: Giving While You’re Alive

Many families consider giving assets away during their lifetime — whether to reduce the size of their taxable estate, to help children buy a home, or simply because they want to see their family enjoy the money while they’re still around. But gifts over a certain amount can trigger tax reporting requirements.

The annual gift tax exclusion

In 2026, you can give up to $19,000 per person per year without any gift tax consequences. That’s per recipient — so a parent could give $19,000 to each of their three children ($57,000 total) with zero tax implications. If both parents give, the couple can give $38,000 per recipient per year.

This exclusion resets every year. Gifts within the exclusion don’t count against anything — no reporting, no tax, no reduction of the estate tax exemption.

The lifetime gift tax exemption

Gifts above the annual exclusion count against your lifetime gift tax exemption — which is the same $13.99 million as the estate tax exemption. They’re a unified system: every dollar you use against the gift tax exemption during your lifetime reduces the amount available as your estate tax exemption at death.

So if a parent gives a child $119,000 in one year, the first $19,000 is covered by the annual exclusion. The remaining $100,000 counts against their $13.99 million lifetime exemption, reducing it to $13.89 million. No tax is actually owed — but a gift tax return (IRS Form 709) must be filed to report it.

Practical reality: very few people will ever exhaust their lifetime exemption through gifts. But the reporting requirement is real, and failing to file Form 709 when required is a compliance issue.

Gifts that are always tax-free

Certain gifts don’t count toward either the annual exclusion or the lifetime exemption:

• Tuition payments — paid directly to the educational institution (not to the student)
• Medical expenses — paid directly to the healthcare provider
• Gifts to a spouse — unlimited, if the spouse is a U.S. citizen
• Gifts to qualified charities — unlimited
• Gifts to political organizations

This is where strategic giving can help. A grandparent paying a grandchild’s college tuition directly to the university doesn’t use any gift tax exclusion at all — and can still give the grandchild $19,000 on top of it.

For a deeper dive into gifting strategies, see our guide on gift tax and annual exclusions.

Step-Up in Basis: The Tax Break Most People Don’t Know About

This is one of the most valuable tax benefits in the entire estate planning world, and most people have never heard of it. Here’s how it works:

When you inherit an asset, your tax basis (the value used to calculate capital gains when you eventually sell it) “steps up” to the asset’s fair market value at the date of the owner’s death. This can save heirs enormous amounts in capital gains taxes.

Example: Your parents bought their house in 1985 for $80,000. When your mother passes away, the house is worth $450,000. If she had sold it the day before she died, there would be approximately $370,000 in capital gains (potentially taxable). But because you inherited it, your basis steps up to $450,000. If you sell it the next week for $450,000, your capital gain is zero. No tax.

The step-up in basis applies to most inherited assets: real estate, stocks, bonds, business interests, and other appreciated property. It does not apply to retirement accounts (IRAs, 401(k)s), which are taxed as ordinary income when distributed to heirs.

Why this matters for planning

The step-up in basis creates an important planning principle: appreciated assets are often worth more if passed at death than if given away during life.

If your parent gives you their house while they’re alive, you inherit their original basis ($80,000 in the example above). When you sell for $450,000, you’d owe capital gains tax on $370,000. But if you inherit the same house at death, you get the stepped-up basis and owe nothing.

This is why estate planning attorneys often advise against gifting highly appreciated assets during life — even though gifting can reduce the size of a taxable estate. The step-up benefit can be worth far more than the estate tax savings, especially for estates below the exemption threshold.

Community property states get a double step-up

In the 9 community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), when one spouse dies, both halves of community property receive a step-up in basis — not just the deceased spouse’s half. This is a significant tax advantage that common law states don’t provide.

If your parents live in a community property state, this double step-up can save the surviving spouse substantial capital gains taxes if they later sell the home or other appreciated assets.

Estate Tax Reduction Strategies (When They’re Needed)

For families whose estates are large enough to face federal or state estate tax, several legitimate strategies can reduce the tax burden. These aren’t loopholes — they’re tools built into the tax code, and they all involve trade-offs.

Strategic lifetime gifting

Using the annual gift tax exclusion systematically can move significant wealth out of a taxable estate over time. A couple with three married children and four grandchildren could gift $19,000 to each of 10 people — $190,000 per year — completely tax-free. Over a decade, that’s $1.9 million removed from the estate with zero gift tax consequences. (See our full guide to gift tax strategies.)

Irrevocable life insurance trusts (ILITs)

If your parents own a life insurance policy, the death benefit is included in their taxable estate. An ILIT removes the policy from the estate by having the trust — not the individual — own it. The death benefit then passes to beneficiaries outside the estate. The trade-off: once the policy is in the ILIT, you can’t take it back. The trust must be set up and funded correctly, and the policy must be owned by the trust for at least three years before death to avoid being pulled back into the estate.

Charitable giving

Gifts to qualified charities reduce the taxable estate dollar-for-dollar. For families with charitable inclinations and taxable estates, tools like charitable remainder trusts (CRTs) and donor-advised funds can accomplish both philanthropic goals and tax reduction. A CRT, for instance, can provide income to the donor during their lifetime, with the remainder going to charity at death — reducing the estate while generating a stream of payments.

Grantor retained annuity trusts (GRATs)

A GRAT allows a person to transfer appreciating assets to beneficiaries with minimal gift tax. The grantor puts assets into the trust and receives annuity payments for a set term. If the assets grow faster than the IRS’s assumed rate of return, the excess growth passes to beneficiaries tax-free. GRATs are particularly effective in low-interest-rate environments and for assets expected to appreciate significantly.

Family limited partnerships (FLPs)

For families with business interests, investment portfolios, or real estate holdings, an FLP can transfer wealth at a discounted value. The parents retain control as general partners while gifting limited partnership interests to children at a valuation discount (since limited partners have no control and limited marketability). This is a legitimate strategy but one that the IRS scrutinizes closely — professional guidance is essential.

A word of caution: all of these strategies require professional implementation. An estate planning attorney and a CPA or tax advisor should work together to ensure everything is structured correctly. The cost of professional guidance is a fraction of the tax savings — and the cost of getting it wrong can be significant.

Do My Parents Actually Need Estate Tax Planning?

Here’s a practical framework to help your family figure out whether estate taxes are something you need to actively plan around — or something you can stop worrying about:

Most families reading this guide fall into the first two categories. And that’s genuinely good news — it means federal estate tax isn’t your fight. But state taxes, probate costs, and making sure the right assets get to the right people? Those matter for every family, regardless of estate size.

Common Estate Tax Myths

“The government takes half your money when you die.”

This is the most persistent myth in estate planning. The federal estate tax rate is 40%, not 50% — and it only applies to the amount above the exemption. With the exemption at $13.99 million per person, fewer than 0.1% of estates owe any federal estate tax at all. For the overwhelming majority of families, the government takes nothing.

“Life insurance isn’t part of my estate.”

It is. If you own a life insurance policy, the death benefit is included in your taxable estate. A $1 million policy can push an otherwise non-taxable estate over the threshold — particularly at the state level. An irrevocable life insurance trust (ILIT) can remove the policy from your estate, but it must be set up correctly and the policy must be owned by the trust, not by you.

“I can just give everything away before I die and avoid estate tax.”

The gift tax and estate tax share the same exemption. Giving away $5 million during your life reduces your estate tax exemption by $5 million at death. The systems are designed to work together — you can’t end-run around estate tax simply by gifting. (Though strategic gifting within the annual exclusion can be part of a legitimate plan.)

“Putting assets in a revocable trust reduces estate taxes.”

It doesn’t. A revocable living trust is excellent for avoiding probate and managing incapacity, but it does not remove assets from your taxable estate. For estate tax reduction, you’d need an irrevocable trust — which means giving up control of the assets.

“My state doesn’t have an estate tax, so I’m fine.”

Maybe. But does your state have an inheritance tax? Do your beneficiaries live in a state with an inheritance tax? Did your parents own property in a state with an estate tax? Cross-state issues are more common than people realize, especially for families with property in multiple states.

Frequently Asked Questions

What’s the difference between estate tax and inheritance tax?

Estate tax is paid by the estate (out of the deceased person’s assets) before distribution. Inheritance tax is paid by the individual beneficiaries on what they receive. Estate tax is based on the total estate value; inheritance tax is based on each beneficiary’s share and their relationship to the deceased. Some states have one, some have the other, Maryland has both.

Will the estate tax exemption really drop in 2026?

Under current law, yes — the TCJA provisions expire after December 31, 2025, and the exemption would revert to approximately $7 million per person (adjusted for inflation). Congress could extend the current exemption, raise it, lower it, or create an entirely new framework. As of early 2025, there is no enacted legislation to prevent the sunset. Plan for the law as it is, not as you hope it will be.

Do retirement accounts (IRAs, 401(k)s) count toward estate tax?

Yes. The value of retirement accounts is included in the gross estate for estate tax purposes. Additionally, beneficiaries who inherit retirement accounts will owe income tax on distributions (because the original owner never paid income tax on that money). This can create a “double tax” situation for very large estates — though for most families, the estate tax exemption prevents the estate tax portion.

Can a trust reduce estate taxes?

A revocable trust does not reduce estate taxes. An irrevocable trust can — by removing assets from your taxable estate. Other specialized trusts (GRATs, QPRTs, charitable remainder trusts, ILITs) can also reduce estate tax exposure, but each comes with significant trade-offs and complexity. These are strategies for larger estates and should only be implemented with professional guidance.

What if my parents live in one state but own property in another?

Estate tax is generally based on the state of residence for personal property (bank accounts, investments) and the state where real estate is located for real property. If your parents live in Florida (no estate tax) but own a vacation home in Massachusetts (estate tax at $2 million), the Massachusetts property could trigger Massachusetts estate tax even though Florida has none. This is another reason a living trust is valuable — it can also help avoid ancillary probate in the second state.

Should we consider moving to a state with no estate tax?

Some people do, but it’s a major life decision that shouldn’t be driven by tax planning alone. Domicile changes involve more than just buying a house in a new state — you need to genuinely relocate: driver’s license, voter registration, primary residence, healthcare providers, and more. And if your estate is below the state exemption, there’s no tax to avoid in the first place. Talk to both an estate planning attorney and a tax advisor before making a move for tax reasons.

Your Next Step

Estate tax planning sounds intimidating, but for most families it comes down to a few key questions:

1. Is your parents’ estate above the federal exemption ($13.99 million)? If not, federal estate tax likely isn’t a concern — but watch the 2026 sunset if they’re in the $5-14 million range.
2. Do they live in a state with an estate or inheritance tax? If yes, state-level planning matters. Find your state guide for specifics.
3. Do they have highly appreciated assets? Understanding step-up in basis can save your family significant capital gains taxes.
4. Are they considering lifetime gifts? Strategic use of the annual exclusion and unlimited education/medical exemptions can transfer wealth efficiently. Read our gift tax guide for details.

For most families, the biggest financial risks aren’t estate taxes — they’re probate costs, unfunded trusts, outdated beneficiary designations, and long-term care expenses. Don’t let estate tax anxiety distract from the planning that actually protects your family. The best place to start? Talking to your family about what’s in place and what needs to change.

About this guide: I’m Randy Smith — not a lawyer, not a financial advisor, just a son who went through the estate planning process with his own parents in Tallahassee, Florida. Everything on this site is educational, not legal advice. Your family’s situation is unique — especially when it comes to taxes. I always recommend working with a qualified estate planning attorney and tax advisor in your state. More about me and why I built this site.

Last updated: February 2026. This guide is reviewed quarterly and updated when tax laws or exemption amounts change.