Estate and inheritance taxes are two different taxes that people often confuse. The federal estate tax is paid by the estate itself before assets are distributed, and in 2026 it only applies to estates worth more than $15,000,000, with a top rate of 40% on the excess.1Internal Revenue Service. What’s New — Estate and Gift Tax An inheritance tax, which exists in only a handful of states, is paid by the person receiving the property, and how much they owe depends on how closely they were related to the person who died. Most Americans never encounter either tax. For families who do, the difference between the two determines who writes the check.
Who Actually Pays the Federal Estate Tax
The federal estate tax is a tax on the transfer of property at death. It is paid by the estate, not by the heirs. The executor or personal representative calculates the tax, files the return, and pays what’s owed before distributing anything to beneficiaries.2Internal Revenue Service. Frequently Asked Questions on Estate Taxes
For 2026 the basic exclusion amount is $15,000,000 per person.3Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax The figure was set by the One, Big, Beautiful Bill Act (Public Law 119-21), signed on July 4, 2025, and will adjust for inflation starting in 2027.1Internal Revenue Service. What’s New — Estate and Gift Tax A married couple can shelter up to $30,000,000 combined by using portability, discussed below.
The rate schedule is graduated, running from 18% on the first $10,000 of taxable value up to 40% on taxable amounts over $1,000,000.4Office of the Law Revision Counsel. 26 USC 2001 – Tax Imposed In practice, because the exemption absorbs everything in the lower brackets, any estate that actually owes tax pays 40% on every dollar above the $15,000,000 threshold.
What Counts Toward the Estate
The gross estate includes almost everything the deceased owned or had a financial interest in at death, valued at fair market value on the date of death rather than the original purchase price.2Internal Revenue Service. Frequently Asked Questions on Estate Taxes Real estate, bank and brokerage accounts, retirement accounts, business interests, vehicles, and personal property all belong in the tally. Life insurance proceeds count if the deceased owned the policy. Property held in a revocable trust counts too, because the person retained control during life.
Digital assets belong in the estate. The IRS treats cryptocurrency, NFTs, stablecoins, and other blockchain holdings as property, and the executor must value them in U.S. dollars as of the date of death and report them on the return.5Internal Revenue Service. Digital Assets Without records of wallets and access credentials, these assets can be effectively lost.
Deductions That Reduce or Eliminate the Bill
The taxable estate is what remains after deductions. Mortgages and outstanding debts, funeral costs, and administration expenses like attorney and accounting fees are deductible.2Internal Revenue Service. Frequently Asked Questions on Estate Taxes Losses during administration, such as a house that burns down before it can be sold, come off too.
Two deductions do most of the heavy lifting. The marital deduction allows unlimited transfers to a surviving spouse tax-free. The charitable deduction does the same for property left to qualifying charities.2Internal Revenue Service. Frequently Asked Questions on Estate Taxes Someone who leaves everything to a spouse or charity owes no federal estate tax regardless of the total.
Assets that require professional judgment to value — closely held businesses, rental properties, art, mineral rights — need qualified appraisals. The appraiser must have verifiable education and experience with that specific type of property, cannot be the executor or a beneficiary, and cannot charge a fee tied to the appraised value.6eCFR. 26 CFR 1.170A-17 – Qualified Appraisal and Qualified Appraiser Estate tax returns are audited more often than personal income tax returns, and inflated valuations draw scrutiny fast.
The Bigger Tax Benefit for Most Heirs: Stepped-Up Basis
Most people who inherit property never pay estate tax, but they do get a valuable break on income tax. When you inherit property, your cost basis resets to the fair market value on the date of death, not what the original owner paid.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This is the stepped-up basis, and it can wipe out decades of accumulated capital gains.
The math is worth understanding. If a parent bought stock for $50,000 thirty years ago and it was worth $500,000 at their death, your basis becomes $500,000. Sell it the next week at $500,000 and there’s no capital gains tax on the $450,000 of appreciation. The same principle applies to a house, a business interest, or any other appreciated asset that passes at death rather than by lifetime gift.
Lifetime Gifts and the Unified Exemption
Estate tax and gift tax share a single lifetime exemption. Taxable gifts made during life reduce the amount available at death. If you use $3,000,000 of the exemption through lifetime gifts, your estate has $12,000,000 of shelter left rather than $15,000,000.1Internal Revenue Service. What’s New — Estate and Gift Tax
The annual gift tax exclusion sits on top of that. In 2026 you can give up to $19,000 per recipient each year without touching your lifetime exemption at all, and married couples who agree to split gifts can give $38,000 per recipient.8Internal Revenue Service. Frequently Asked Questions on Gift Taxes Gifts above the annual limit require filing Form 709 and reduce your remaining lifetime exemption dollar for dollar, but no gift tax is actually owed until cumulative excess gifts pass $15,000,000.
Portability for Surviving Spouses
When one spouse dies without using the full $15,000,000 exemption, the survivor can claim what’s left, called the Deceased Spousal Unused Exclusion (DSUE), on top of their own exemption.9Internal Revenue Service. Instructions for Form 706 Portability is how a couple reaches the combined $30,000,000 shelter.
It is not automatic. The executor of the first spouse’s estate has to file a complete Form 706 even if the estate is well below the filing threshold and owes no tax. The return is due within nine months of death, or by the end of a six-month extension. Executors who miss that deadline may still qualify under a special extension that permits portability elections up to five years after death.9Internal Revenue Service. Instructions for Form 706 After five years, the only path is an expensive private letter ruling.
One trap: DSUE comes only from the most recent deceased spouse. A surviving spouse who remarries and outlives the second spouse loses the first spouse’s unused exemption unless it was used before the second death, for example through lifetime gifts.9Internal Revenue Service. Instructions for Form 706
State Estate Taxes and State Inheritance Taxes
Federal law is only half the picture, and this is where estate tax and inheritance tax finally diverge.
About a dozen states plus the District of Columbia impose their own estate taxes. State exemptions are far lower than the federal $15,000,000, ranging from roughly $1,000,000 to over $13,000,000, and state rates can reach 16% or higher. An estate that owes nothing to the IRS can still face a real state tax bill. Like the federal tax, these state estate taxes come out of the estate before distribution.
A separate group of states, currently five, imposes an inheritance tax. This is the tax paid by the recipient, and it works differently in an important way: what each heir owes depends on their relationship to the deceased. Surviving spouses are typically exempt entirely. Children and other close relatives pay lower rates. Distant relatives and unrelated beneficiaries pay the highest rates. One state charges both an estate tax and an inheritance tax, so the estate and the beneficiaries can each face a separate bill.
Location of the property matters too. Living in a state with no estate or inheritance tax does not protect you if you inherit property located in a state that has one. Rules on which state’s tax applies vary by jurisdiction, so it’s worth checking the relevant state revenue department when a death crosses state lines.
Filing, Deadlines, and Penalties
Federal estate tax reporting happens on IRS Form 706. It is required for any estate over the $15,000,000 threshold, and also for estates below the threshold when the executor wants to elect portability for a surviving spouse.10Internal Revenue Service. Information for Executors The form requires a full inventory of assets, fair market values, and every deduction claimed.
The return is due nine months after the date of death.11Office of the Law Revision Counsel. 26 USC 6075 – Time for Filing Estate and Gift Tax Returns Filing Form 4768 on or before that date gets an automatic six-month extension.12eCFR. 26 CFR 20.6081-1 – Extension of Time for Filing the Return The extension applies to filing only. Any estimated tax owed is still due at the nine-month mark.
Before filing, the executor applies for an Employer Identification Number for the estate using Form SS-4, since the estate needs its own tax identity separate from the decedent’s Social Security number.10Internal Revenue Service. Information for Executors From there it’s appraisals, account statements as of the date of death, life insurance information, and records of lifetime gifts. A straightforward estate can take a few months to document. Estates with closely held businesses, multiple properties, or foreign assets often take longer, which is why most executors bring in a CPA or tax attorney.
Penalties for missing the deadlines are steep. Filing Form 706 late costs 5% of the unpaid tax for each month or partial month the return is overdue, capped at 25%. Paying late costs another 0.5% per month, also capped at 25%. When both apply at once, the filing penalty drops to 4.5% so the combined monthly rate stays at 5%.
Willful evasion is a felony. A conviction for willfully attempting to evade or defeat the estate tax can bring a fine of up to $100,000 and up to five years in prison.13Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax Understating asset values, hiding property, and fabricating deductions all fall under that statute. Interest on any underpayment runs from the original due date and compounds on top of the penalties.