The federal estate tax is a one-time tax the IRS charges on the transfer of wealth from a deceased person to their heirs. For deaths in 2026, it applies only to estates worth more than $15 million, and the rate on amounts above that threshold reaches 40 percent.1Internal Revenue Service. Estate Tax The estate itself pays the tax before assets reach beneficiaries. Most estates fall well below the filing threshold and owe nothing.
Who Actually Owes the Tax
Every person has a basic exclusion amount that shields wealth from federal estate tax. For deaths in 2026, that amount is $15 million per individual.2Office of the Law Revision Counsel. 26 U.S.C. 2010 – Unified Credit Against Estate Tax Only the portion of an estate that exceeds $15 million is taxed. An estate worth $16 million owes tax on $1 million, not on the full $16 million.
The $15 million figure was set by the One, Big, Beautiful Bill Act, signed into law on July 4, 2025, which made the higher exemption permanent rather than letting the 2017 Tax Cuts and Jobs Act numbers expire.3Internal Revenue Service. What’s New – Estate and Gift Tax Starting in 2027, the exemption will be adjusted upward for inflation.
Portability Between Spouses
When one spouse dies without using their full $15 million exemption, the leftover amount can transfer to the surviving spouse. This is called the deceased spousal unused exclusion, or DSUE. If a spouse dies with $4 million in assets, the unused $11 million can be added to the survivor’s own $15 million, giving the surviving spouse a combined $26 million shield.4Internal Revenue Service. Frequently Asked Questions on Estate Taxes
Portability is not automatic. The executor of the first spouse’s estate must file Form 706 and specifically elect it, even when no tax is owed. For estates not otherwise required to file, the IRS allows a simplified late election within five years of the date of death. Miss that window and the unused exemption is gone permanently.
What Goes Into the Taxable Estate
The starting point is the gross estate: the fair market value of everything the deceased owned or held an interest in at the time of death.5Office of the Law Revision Counsel. 26 U.S.C. 2031 – Definition of Gross Estate Homes, bank accounts, investment portfolios, business interests, and personal property all count. So do several categories that surprise families.
Life insurance is the biggest one. If the deceased held any control over a policy at death — the power to change the beneficiary, borrow against it, or cancel it — the full death benefit gets included in the gross estate, even though the money goes straight to a named beneficiary.6Office of the Law Revision Counsel. 26 U.S.C. 2042 – Proceeds of Life Insurance A $2 million policy can push an otherwise non-taxable estate over the threshold.
Jointly held property follows its own rules. When spouses co-own property as joint tenants or tenants by the entirety, half the value belongs in the first spouse’s gross estate.7Office of the Law Revision Counsel. 26 U.S.C. 2040 – Joint Interests For joint ownership with anyone other than a spouse, the entire value is presumed to belong to the deceased unless the surviving co-owner can prove they contributed their own money toward the purchase.
How Assets Are Valued
Every asset is valued at fair market value on the date of death: the price a willing buyer and willing seller would agree on, both informed and neither under pressure.8Internal Revenue Service. Rev. Proc. 96-15 Publicly traded stock is easy. Real estate, artwork, and closely held business interests typically require a professional appraisal from someone with verifiable experience valuing that type of property.
If asset values drop after death, the executor can elect to value the entire estate six months later instead. Property sold or distributed before that six-month mark is valued on the date it changed hands. The election is available only when it reduces both the gross estate value and the total tax owed, and once made it cannot be reversed.9Office of the Law Revision Counsel. 26 U.S.C. 2032 – Alternate Valuation For estates hit by a market downturn, this can save hundreds of thousands of dollars.
Deductions That Shrink the Taxable Estate
After the gross estate is added up, several deductions reduce the amount actually subject to tax.
The Marital Deduction
Transfers to a surviving spouse who is a U.S. citizen are fully deductible with no dollar limit. A person can leave their entire estate to a citizen spouse and owe zero federal estate tax.10Office of the Law Revision Counsel. 26 U.S.C. 2056 – Bequests, Etc., to Surviving Spouse The tax is deferred, not eliminated. When the second spouse dies, the combined wealth is measured against that spouse’s exemption.
Non-citizen spouses are treated differently. The unlimited marital deduction does not apply unless assets pass through a qualified domestic trust (QDOT), which requires at least one U.S. citizen or domestic corporation as trustee and restricts distributions of principal until tax is withheld.11Office of the Law Revision Counsel. 26 U.S.C. 2056A – Qualified Domestic Trust
Charitable Bequests
Gifts at death to qualifying charitable, religious, educational, or governmental organizations are fully deductible from the gross estate, with no cap.12Office of the Law Revision Counsel. 26 U.S.C. 2055 – Transfers for Public, Charitable, and Religious Uses
Debts and Administration Costs
The estate can deduct funeral expenses, attorney fees, executor commissions, accountant fees, court costs, and other costs of settling the estate, along with the outstanding debts the deceased owed at death.13Office of the Law Revision Counsel. 26 U.S.C. 2053 – Expenses, Indebtedness, and Taxes The tax then applies only to net wealth actually reaching heirs.
How the Tax Is Calculated
The federal estate tax uses a progressive rate schedule that starts at 18 percent and climbs through 12 brackets to 40 percent on amounts over $1 million.14Office of the Law Revision Counsel. 26 U.S.C. 2001 – Imposition and Rate of Tax The IRS computes a tentative tax on the entire taxable amount, then subtracts the unified credit tied to the $15 million exclusion. In practice, the credit absorbs every bracket below 40 percent, so every dollar above the exemption is taxed at the top rate. An estate that exceeds the $15 million exemption by $2 million owes roughly $800,000.
- $0–$10,000: 18%
- $10,001–$20,000: 20%
- $20,001–$40,000: 22%
- $40,001–$60,000: 24%
- $60,001–$80,000: 26%
- $80,001–$100,000: 28%
- $100,001–$150,000: 30%
- $150,001–$250,000: 32%
- $250,001–$500,000: 34%
- $500,001–$750,000: 37%
- $750,001–$1,000,000: 39%
- Over $1,000,000: 40%
Lifetime Gifts Count Against the Same Exemption
The federal gift tax and the estate tax share one unified exemption. The $15 million covers both lifetime taxable gifts and transfers at death combined, not $15 million for each.15Internal Revenue Service. Estate and Gift Tax FAQs Every taxable gift made during life reduces the exemption available at death.
What Heirs Get: The Step-Up in Basis
When heirs inherit appreciated property, their cost basis for future capital gains resets to the fair market value on the date of death, not what the deceased originally paid. Stock bought decades ago for $50,000 and worth $500,000 at death is inherited at the $500,000 figure. If the heirs sell it the next day for $500,000, they owe no capital gains tax on the $450,000 of appreciation. The step-up applies regardless of whether the estate actually owes any estate tax.
Generation-Skipping Transfers
A separate federal tax targets transfers that skip a generation, such as a grandparent leaving assets directly to a grandchild. The generation-skipping transfer tax carries a flat 40 percent rate and has its own $15 million exemption for 2026, matching the estate tax exemption. A married couple can shield up to $30 million from the GST tax. Form 706 handles GST tax reporting alongside the estate tax.16Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
Filing Form 706
The executor reports and pays the tax on IRS Form 706. The return requires a detailed inventory of every asset in the gross estate, sorted into schedules covering real estate, stocks and bonds, insurance, jointly owned property, and other categories. The executor must also report the deceased’s lifetime taxable gifts, which affect the calculation.17Internal Revenue Service. Form 706 – United States Estate and Generation-Skipping Transfer Tax Return A certified copy of the death certificate must accompany the filing, and appraisals must support the values reported for significant assets.18Internal Revenue Service. Instructions for Form 706
Deadline and Extensions
Form 706 is due nine months after the date of death. Filing Form 4768 before that deadline grants an automatic six-month extension to file.19eCFR. 26 CFR 20.6081-1 – Extension of Time for Filing the Return The extension covers only the paperwork. The tax itself is still due at the original nine-month mark, and interest accrues on any unpaid balance from that date forward.
Installment Payments for Business Owners
If a closely held business makes up more than 35 percent of the adjusted gross estate, the executor can elect to pay the tax attributable to the business in installments over up to 10 years, with the first payment deferred up to five years after the normal due date.20Office of the Law Revision Counsel. 26 U.S.C. 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business This prevents families from being forced to sell a business to cover the bill. A closely held business here means a sole proprietorship, a partnership with 45 or fewer partners, or a corporation with 45 or fewer shareholders. The election must be made on the estate tax return by the filing deadline, including extensions.
Penalties for Missing the Deadlines
Late filing costs 5 percent of the unpaid tax for each month or partial month the return is late, up to 25 percent total.21Internal Revenue Service. Failure to File Penalty Late payment adds a separate 0.5 percent per month on unpaid tax, also capping at 25 percent, and rises to 1 percent per month if the IRS issues a notice of intent to levy and the balance is not paid within 10 days.22Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges Interest accrues on top of both penalties. On a multimillion-dollar bill, even a few months of delay reaches into six figures. Both penalties can be waived if the executor shows reasonable cause.
State Estate and Inheritance Taxes Are Separate
The federal tax is not the whole picture. Roughly a dozen states and the District of Columbia impose their own estate or inheritance taxes, and their exemption thresholds are often far lower than the federal $15 million — some starting near $1 million. An estate that owes nothing to the IRS can still face a significant state bill. Executors need to check the rules in the state where the deceased lived and in any state where real property was owned.