The federal estate tax is a tax on the transfer of property at death, but for 2026 it only applies to estates worth more than $15 million per person, so the overwhelming majority of estates owe nothing.1Internal Revenue Service. Estate Tax The tax is assessed against the estate itself before beneficiaries receive their shares, which makes it different from the inheritance taxes some states charge to the people receiving property. An executor or personal representative handles the filing and payment, and getting those obligations wrong can create real financial exposure for the person in that role.
The $15 Million Exemption
The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently set the federal estate and gift tax exemption at $15 million per person for 2026.2Internal Revenue Service. What’s New – Estate and Gift Tax That replaced the temporary exemption from the 2017 Tax Cuts and Jobs Act, which had been set to expire at the end of 2025. Starting in 2027, the $15 million figure adjusts upward each year for inflation.3Internal Revenue Service. One Big Beautiful Bill Provisions
The exemption is unified, meaning it covers lifetime gifts and transfers at death together. Every taxable gift you make during your life reduces what’s left of the exemption at death. Someone who gave away $3 million in taxable gifts would have $12 million of exemption remaining. The gift tax and estate tax share the same bucket, and that catches people off guard.
Portability for Married Couples
Married couples can shield up to $30 million between them through a feature called portability. When the first spouse dies, any unused portion of their $15 million exemption can transfer to the surviving spouse.4Internal Revenue Service. Instructions for Form 706 The catch: the executor must file Form 706 to make the election, even when the first spouse’s estate is well below the filing threshold. Skip that filing and the unused exemption disappears permanently. Many families leave money on the table right here.
What Counts as the Gross Estate
The gross estate includes the fair market value of everything the decedent owned or had certain interests in at death: real estate, bank accounts, investment accounts, retirement funds, and personal property like vehicles and jewelry.5Office of the Law Revision Counsel. 26 U.S. Code 2031 – Definition of Gross Estate It also captures items people don’t always think of: revocable trust assets, business interests, and debts owed to the decedent.
Life insurance is the most common surprise. Proceeds payable to the estate are always included. Proceeds payable to a named beneficiary are also included if the decedent held any “incidents of ownership” in the policy at death, meaning the power to change beneficiaries, cancel the policy, or borrow against its cash value.6Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance A large policy can push an otherwise non-taxable estate over the threshold, which is why planners often move ownership into an irrevocable life insurance trust well before death.
Assets are usually valued as of the date of death. If values fall sharply in the months after, the executor can elect to value the whole estate six months later instead. This alternate valuation date is available only when it lowers both the gross estate and the total tax, and the election is irrevocable once made.7Office of the Law Revision Counsel. 26 U.S. Code 2032 – Alternate Valuation
Deductions That Reduce the Taxable Estate
After totaling the gross estate, the executor subtracts deductions to reach the taxable estate. Two of those deductions have no dollar limit at all.
An unlimited amount of property can pass to a surviving spouse free of federal estate tax, so long as that spouse is a U.S. citizen.8Office of the Law Revision Counsel. 26 U.S. Code 2056 – Bequests, Etc., to Surviving Spouse The marital deduction defers rather than eliminates the tax: the combined assets get taxed in the surviving spouse’s estate later, offset by whatever exemption remains. When the surviving spouse is not a U.S. citizen, the unlimited deduction is available only if the assets pass through a Qualified Domestic Trust.
Bequests to qualifying charities, religious organizations, educational institutions, and government entities are fully deductible with no cap.9Office of the Law Revision Counsel. 26 U.S. Code 2055 – Transfers for Public, Charitable, and Religious Uses The deduction cannot exceed the property’s value as reported in the gross estate, and split-interest gifts must be structured as specific trust types to qualify.
The estate also deducts funeral costs, executor fees, attorney fees, appraisal expenses, outstanding debts, and mortgages on property included in the gross estate.10Office of the Law Revision Counsel. 26 U.S. Code 2053 – Expenses, Indebtedness, and Taxes
How the Tax Is Actually Calculated
Federal estate tax rates are progressive. They start at 18 percent on the first $10,000 of the taxable amount and climb through a series of brackets to a top rate of 40 percent on amounts above $1 million.11Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax Those brackets look alarming in isolation, but the unified credit neutralizes almost all of them.
The executor first calculates a tentative tax on the entire taxable estate using the rate schedule, as if no exemption existed. Then the unified credit, which equals the tax that would be owed on the first $15 million, is subtracted.12Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax Estates at or below $15 million owe nothing. For estates above the exemption, effectively only the excess is taxed, and at the 40 percent top rate. An estate of $17 million faces tax on roughly the $2 million above the exemption, not on the full $17 million.
Stepped-Up Basis Matters Even When No Tax Is Owed
The step-up in basis is one of the most valuable features of the estate tax system, and it applies even when the estate is well below the filing threshold. When you inherit property, your cost basis for capital gains purposes resets to the property’s fair market value at the date of death, or the alternate valuation date if elected.13Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
The impact is enormous. If your parent bought stock for $50,000 decades ago and it was worth $800,000 at death, you inherit it with an $800,000 basis. Sell it the next day for $800,000 and you owe zero capital gains tax. Without the step-up, you’d owe capital gains tax on $750,000 of appreciation. When an estate tax return is filed, the basis reported by beneficiaries must be consistent with the value reported on that return.
Filing Form 706
The executor files Form 706 when the gross estate, plus adjusted taxable gifts and any specific gift tax exemption, exceeds the filing threshold for the year of death.14Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return For 2026 deaths, that threshold is $15 million. Executors who want to elect portability for a surviving spouse must file as well, even when the estate falls below the threshold.
Form 706 is due nine months after the date of death.15Internal Revenue Service. Instructions for Form 4768 Filing Form 4768 before that date gets an automatic six-month extension.16eCFR. 26 CFR 20.6081-1 – Extension of Time for Filing the Return The extension covers the paperwork only; interest on any unpaid tax still accrues from the original nine-month deadline. Waiting to file because you assumed the estate was below the threshold, only to find out it wasn’t, is one of the more expensive mistakes executors make.
The return requires a complete inventory of assets with fair market values, supporting schedules for each category of property, and the decedent’s will and death certificate. Real estate, closely held businesses, and valuable personal property like artwork typically need professional appraisals. The nine-month clock starts immediately, so early organization matters.
Payment goes by check or through the Electronic Federal Tax Payment System. After the IRS processes the return, the executor can request an estate tax closing letter confirming the tax liability is settled.17Internal Revenue Service. Frequently Asked Questions on the Estate Tax Closing Letter The letter costs $56, is requested through Pay.gov, and executors should wait at least nine months after filing unless the account transcript already shows the return was accepted.18Internal Revenue Service. Estate Tax Closing Letter Fee Reduced to $56 Effective May 21, 2025 Many probate courts and banks require the letter before letting the executor distribute remaining assets.
Executor Personal Liability and Penalties
Serving as executor carries more financial risk than most people realize. Federal law makes a representative personally liable when they distribute estate assets to beneficiaries or other creditors before satisfying the government’s tax claim.19Office of the Law Revision Counsel. 31 USC 3713 – Priority of Government Claims The liability extends to the amount distributed. An executor who hands out inheritances before the IRS confirms the estate tax is settled could end up paying the shortfall from personal funds.20Internal Revenue Service. Responsibilities of an Estate Administrator The closing letter exists to protect against exactly this.
The IRS imposes separate penalties for filing late and paying late, and both can run at the same time:
- Failure to file: 5 percent of the unpaid tax for each month or partial month the return is overdue, up to 25 percent. If the return is more than 60 days late, the minimum penalty is the lesser of $525 or 100 percent of the tax owed.21Internal Revenue Service. IRS Notices and Bills, Penalties and Interest Charges
- Failure to pay: 0.5 percent of the unpaid tax per month, up to 25 percent. The rate jumps to 1 percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy.
- Interest: accrues on unpaid tax from the original due date at the federal short-term rate plus 3 percentage points, compounding daily. Unlike penalties, interest generally isn’t waived.
On a large estate these numbers move fast. An estate owing $2 million in tax that files five months late without an extension could face $500,000 in failure-to-file penalties alone, plus separate failure-to-pay penalties and daily interest. Filing Form 4768 for the automatic extension is one of the simplest protective steps an executor can take.
Relief for Farms and Closely Held Businesses
Two provisions exist so families aren’t forced to sell a farm or business to cover the tax bill.
Under a special use valuation election, the executor can value qualifying farm or business real estate at its current use value rather than its highest and best use. The maximum reduction from fair market value is a statutory amount that adjusts annually for inflation. To qualify, the farm or business property must be at least 50 percent of the adjusted gross estate, the real property alone at least 25 percent, and the decedent or a family member must have actively used and materially participated in the operation for at least five of the eight years before death.22Office of the Law Revision Counsel. 26 USC 2032A – Valuation of Certain Farm, Etc., Real Property
When a closely held business interest makes up more than 35 percent of the adjusted gross estate, the executor can elect to pay the estate tax attributable to that interest in installments over 14 years, with only interest due in the first four years and tax payments starting in year five. A closely held business here means a sole proprietorship, a partnership with 45 or fewer partners (or where the decedent owned at least 20 percent of the capital interest), or a corporation with 45 or fewer shareholders (or where the decedent owned at least 20 percent of the voting stock). The election must be made on a timely filed return.23Internal Revenue Service. Collection on Accounts with Special Estate Tax Elections
State Taxes and Non-Resident Aliens
Federal estate tax is only part of the picture. Roughly a dozen states and the District of Columbia impose their own estate taxes, several states levy inheritance taxes on the people receiving property, and one state imposes both. State exemptions are typically far lower than the federal one, with some starting as low as $1 million. Top state estate tax rates range from around 12 percent to as high as 35 percent. Inheritance tax rates vary by the beneficiary’s relationship to the decedent, with close family paying lower rates or nothing and distant or unrelated recipients facing the steepest charges.
An estate that owes zero federal tax may still owe a substantial state bill. Check the rules in the state where the decedent lived and in any state where they owned real property, because some states tax property within their borders regardless of where the owner resided.
Non-citizens who are not U.S. residents face a much lower threshold. Filing is triggered when U.S.-situated assets, combined with adjusted taxable gifts and any specific gift tax exemption, exceed just $60,000, and that figure is not indexed for inflation.24Internal Revenue Service. Estate Tax for Nonresidents Not Citizens of the United States U.S.-situated assets include U.S. real property, tangible personal property located here, and stock in U.S. corporations. These estates file Form 706-NA rather than the standard Form 706. A tax treaty between the United States and the decedent’s home country may increase the available exemption or provide credits.
Generation-Skipping Transfer Tax
A separate levy exists to stop families from skipping a generation of taxation by leaving assets directly to grandchildren or more remote descendants. The generation-skipping transfer tax applies at a flat 40 percent rate on transfers that skip a generation, on top of any estate or gift tax. The GST exemption for 2026 matches the estate tax exemption at $15 million per person. Executors report generation-skipping transfers on Form 706, which is why its full name references both the estate tax and the GST tax. Trusts designed to benefit multiple generations need careful structuring, because a poorly drafted trust can trigger the GST tax even when the estate tax exemption covers the overall transfer.