Federal Estate Tax: Exclusion, Form 706, and Portability

The federal estate tax is a 40% tax on the value of a deceased person’s property that exceeds $15,000,000 for deaths in 2026.¹ It is paid by the estate itself, not by the heirs, and the return and payment are due nine months after death.² Because the exclusion is so high, fewer than 1% of estates owe anything.

The 2026 Exclusion and Who Actually Owes

For a person dying in 2026, the basic exclusion amount is $15,000,000.¹ That figure comes from the One, Big, Beautiful Bill signed into law on July 4, 2025, which replaced the temporary doubled exemption from the 2017 Tax Cuts and Jobs Act with a permanent $15 million floor. Starting in 2027, the amount adjusts upward for inflation.³

An executor must file a federal estate tax return when the gross estate exceeds the exclusion amount.⁴ For 2026, that filing threshold is $15,000,000.⁵ The threshold effectively drops if the deceased made taxable gifts during their lifetime, because those gifts reduce the remaining exclusion available at death. A married couple can shield up to $30 million combined by using both spouses’ exclusions through portability.

What Counts Toward the Estate

The gross estate is the fair market value of everything the person owned or had an interest in at death.⁶ That covers real estate, bank accounts, investment portfolios, business interests, retirement accounts, and personal property such as jewelry and art collections. Digital assets with monetary value are included. Everything is valued at current market price, not what the owner paid for it.

Life insurance proceeds count toward the gross estate if the deceased owned the policy or held “incidents of ownership” at death — rights such as changing beneficiaries, borrowing against the policy, or canceling it.⁷ Proceeds paid to a named beneficiary other than the estate are still included when the deceased held those rights.

Certain transfers made within three years of death get pulled back into the gross estate.⁸ The rule primarily targets life insurance policies transferred to remove them from the estate and gifts of interests that would otherwise be included under the retained-interest rules.

Alternate Valuation Date

Assets are normally valued on the date of death. An executor can elect to use a date six months later if doing so would lower both the gross estate value and the total tax owed.⁹ This helps when markets drop after death. Any asset sold or distributed during the six-month window is valued on the date it left the estate. The election applies to the entire estate and is irrevocable once made.

Deductions That Reduce the Taxable Estate

The taxable estate is what remains after allowable deductions are subtracted from the gross estate.¹⁰ For many wealthy families, deductions are the difference between owing millions and owing nothing.

Marital Deduction

The marital deduction allows unlimited transfers to a surviving spouse with no estate tax.¹¹ Leave everything to your spouse and the bill is zero, whatever the amount. The tax is deferred rather than eliminated: it comes due when the surviving spouse dies.

One limitation matters. The marital deduction does not apply when the surviving spouse is not a U.S. citizen.¹¹ Couples in that situation typically use a qualified domestic trust (QDOT) to qualify. A Qualified Terminable Interest Property (QTIP) trust also qualifies if the surviving spouse receives all income for life and no one else can reach the principal during the spouse’s lifetime.¹²

Charitable Deduction

Property left to qualified charitable, religious, educational, or governmental organizations is fully deductible from the gross estate, with no dollar cap.¹³

Debts and Expenses

The estate can deduct attorney fees, executor compensation, accounting costs, court filing fees, appraisal expenses, and funeral costs. Outstanding debts at the time of death — mortgages, credit card balances, unpaid taxes — are also deductible.¹⁰ Modest against a $15 million estate, but every dollar shaves 40 cents off the tax.

How the Tax Is Calculated

The rate schedule is graduated on paper, running from 18% on the first $10,000 of taxable value up through twelve brackets to a top rate of 40% on amounts over $1,000,000.² In practice, the lower brackets never touch a taxable estate.

Here is why. The IRS computes a tentative tax on the full taxable estate using the schedule, then subtracts the unified credit, which equals the tax that would be owed on $15,000,000.¹⁴ Because $15 million sits deep in the 40% bracket, the credit wipes out all tax through the lower brackets and most of the 40% bracket. The net result: every dollar above $15 million is effectively taxed at a flat 40%.

Lifetime taxable gifts factor in too. The estate tax and gift tax share a unified rate schedule, so taxable gifts made during life are added back to the taxable estate when computing the tentative tax, and gift tax already paid is credited. An estate where the deceased used $5 million of the exclusion through lifetime taxable gifts has only $10 million of exclusion left at death.

Portability Between Spouses

When the first spouse dies without using the full $15 million exclusion, the leftover portion can pass to the surviving spouse. This is called portability of the Deceased Spousal Unused Exclusion (DSUE). If a spouse dies in 2026 with a taxable estate of $6 million, the unused $9 million can transfer to the surviving spouse, giving the survivor an effective exclusion of $24 million.¹⁵

Portability is not automatic. The executor of the first spouse’s estate must file Form 706 and make the election, even when the estate is below the filing threshold and owes no tax. The normal deadline is nine months after death, with a possible six-month extension. For estates that were not otherwise required to file, a relief rule allows the election on a Form 706 filed within five years of death, as long as the executor writes “Filed Pursuant to Rev. Proc. 2022-32 to Elect Portability under section 2010(c)(5)(A)” at the top of the return.¹⁵

Skipping this election is one of the most expensive mistakes in estate planning. The filing itself costs nothing beyond preparation, and failing to make it can cost the surviving spouse’s estate millions at 40%.

Step-Up in Basis for Heirs

When someone inherits property, their tax basis resets to fair market value at the date of the deceased’s death.¹⁶ The step-up eliminates capital gains tax on appreciation that occurred during the original owner’s lifetime. Parent buys stock for $50,000 that is worth $500,000 at death, heir’s basis is $500,000; sold the next day at $500,000, no capital gains tax.

If the executor elected the alternate valuation date, the basis matches the value on that date instead. The basis can never exceed the value reported on the estate tax return. Executors of estates that file Form 706 must also file Form 8971 and give each beneficiary a Schedule A reporting the value of property they received.¹⁷

Filing Form 706 and Paying the Tax

An executor files Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) when the gross estate plus adjusted taxable gifts exceeds $15,000,000 for deaths in 2026.⁵ Estates below that threshold still file if they want to elect portability.

The return is due within nine months of the date of death.¹⁸ An executor can request an automatic six-month filing extension by submitting Form 4768 before the original deadline. The extension covers paperwork only; the tax is still due at the nine-month mark.

Preparing the return means compiling a detailed inventory. The form’s schedules cover real estate, stocks and bonds, cash and notes, life insurance, jointly owned property, and miscellaneous personal property.¹⁹ Professional appraisals are required for real estate and for any individual item or collection valued above $3,000, such as art, jewelry, or coin collections. Records of all lifetime taxable gifts must be pulled together because they change the calculation. Separate schedules handle funeral expenses, administration costs, debts, and charitable and marital bequests. Beneficiary names, Social Security numbers, and relationships to the deceased are required.

Payment goes through the Electronic Federal Tax Payment System (EFTPS), by check mailed with the return, or by same-day wire transfer through a bank.²⁰ After processing, the estate can request an estate tax closing letter confirming the return was accepted and the liability satisfied.²¹ That letter clears the executor to distribute remaining assets and close the estate.

Installment Payments for Business-Heavy Estates

Estates where a closely held business makes up more than 35% of the adjusted gross estate can elect to pay the tax on that business interest in installments over up to 14 years: a five-year deferral where only interest is owed, followed by up to ten annual installments of principal.²² A “closely held business” here includes a sole proprietorship, a partnership with 45 or fewer partners (or where the estate holds 20% or more of the capital), or a corporation with 45 or fewer shareholders (or where the estate holds 20% or more of voting stock). The provision exists so a family business does not have to be liquidated to cover a seven-figure tax bill.

Penalties for Late Filing or Payment

Missing the deadlines is expensive. The late filing penalty is 5% of the unpaid tax per month or partial month the return is overdue, capped at 25%.²³ A separate late payment penalty of 0.5% per month applies to unpaid tax, also capped at 25%. Both accrue at once, and interest runs on top. On a $2 million bill, a five-month delay would generate roughly $550,000 in penalties before interest. An executor who cannot pay should still file on time and explore installment options rather than sit on the return.

Generation-Skipping Transfers

A separate federal tax applies to transfers that skip a generation, such as leaving assets directly to grandchildren instead of children. Without it, wealthy families could avoid one round of estate tax by bypassing the middle generation. The generation-skipping transfer (GST) tax closes that gap with an additional flat-rate tax.

The GST rate equals the top federal estate tax rate, currently 40%.²⁴ Each person has a GST exemption equal to the basic exclusion amount, $15,000,000 for 2026, which can be allocated to trusts or direct transfers to shield them.²⁵ Transfers beyond the exemption are hit with the full 40% on top of any estate tax already owed.

State Estate Taxes

The federal tax is not the only one to plan around. Roughly a dozen states and the District of Columbia impose their own separate estate taxes, with exemption thresholds far lower than the federal $15 million — generally in the range of about $1 million to around $7 million. An estate that owes nothing federally can still face a significant state bill. A handful of states also impose inheritance taxes, paid by the individual recipient rather than the estate. Rules vary widely, so an executor should check requirements in any state where the deceased lived or held real property.

1
Internal Revenue Service. What’s New — Estate and Gift Tax
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Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
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Office of the Law Revision Counsel. 26 US Code 2010 – Unified Credit Against Estate Tax
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Office of the Law Revision Counsel. 26 US Code 6018 – Estate Tax Returns
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Internal Revenue Service. Frequently Asked Questions on Estate Taxes
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Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate
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Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance
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Office of the Law Revision Counsel. 26 USC 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death
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Office of the Law Revision Counsel. 26 US Code 2032 – Alternate Valuation
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Office of the Law Revision Counsel. 26 USC 2051 – Definition of Taxable Estate
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Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
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eCFR. 26 CFR 20.2056(b)-7 – Election With Respect to Life Estate for Surviving Spouse
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Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
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Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
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Internal Revenue Service. Instructions for Form 706
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Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
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Internal Revenue Service. Instructions for Form 8971 and Schedule A
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Office of the Law Revision Counsel. 26 USC 6075 – Time for Filing Estate and Gift Tax Returns
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Internal Revenue Service. Instructions for Form 706 – United States Estate (and Generation-Skipping Transfer) Tax Return
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Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System
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Internal Revenue Service. Frequently Asked Questions on the Estate Tax Closing Letter
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Office of the Law Revision Counsel. 26 USC 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business
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Office of the Law Revision Counsel. 26 US Code 6651 – Failure to File Tax Return or to Pay Tax
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Office of the Law Revision Counsel. 26 USC 2641 – Applicable Rate
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Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption