How the New Federal Estate and Gift Tax Exemption Works

The federal estate and gift tax exemption for 2026 is $15 million per individual, a permanent figure set by the One Big Beautiful Bill Act signed on July 4, 2025.¹ That single amount covers what you transfer during life and what you leave at death combined. Married couples who elect portability can shelter up to $30 million. The $15 million floor has no expiration date, and it will continue to be adjusted for inflation starting in 2027.

How the Unified Exemption Works

Estate tax and gift tax share one pool. Every taxable gift you make during life reduces the exemption available at death.² Give away $3 million in taxable gifts over your lifetime and your remaining exemption at death is $12 million. Whatever exceeds your remaining exemption is taxed at a top rate of 40%.³

Not every gift counts as a taxable gift. In 2026, you can give any individual up to $19,000 without touching your lifetime exemption.⁴ Only the amount above that annual exclusion becomes a taxable gift. Give your daughter $50,000 and $31,000 counts against your lifetime number. Married couples can each apply their own $19,000 exclusion to the same recipient, so a couple can move $38,000 per person per year without eating into the $15 million.

Keep a running total of your lifetime taxable gifts. The IRS tracks the cumulative amount across every Form 709 you file, and the math resurfaces at death when your executor computes the estate tax. Starting the record now spares your family from reconstructing decades of transfers on a deadline.

What Changed Under the One Big Beautiful Bill Act

Before the law passed, the exemption was on track to be cut roughly in half. The 2017 Tax Cuts and Jobs Act had temporarily doubled the exemption, and that increase was scheduled to sunset on December 31, 2025, dropping the exemption to around $7 million per person.⁵ That looming cliff had been driving accelerated gifting strategies for years.

The One Big Beautiful Bill Act removed the sunset. It set the basic exclusion amount at $15 million effective January 1, 2026, with inflation adjustments beginning in 2027, and struck the old temporary provision from the code.² The 40% top rate is unchanged. For reference, the exemption stood at $13.61 million in 2024 and $13.99 million in 2025 before jumping to $15 million in 2026.

Portability for Married Couples

When one spouse dies without using their full exemption, the survivor can claim what’s left through a rule called portability. The formal name is the Deceased Spousal Unused Exclusion. If your spouse used $4 million of their $15 million at death, you can add the remaining $11 million to your own $15 million for $26 million in total shelter.² At the maximum, a couple where the first to die used none of the exemption can shelter $30 million.

Portability is not automatic. The executor of the first spouse’s estate must file Form 706 and make the election, even when the estate owes no tax.² The election is irrevocable once made, and the return must be filed within the normal deadline plus extensions. This is where families most often leave money behind. When the first spouse’s estate is modest, it’s tempting to skip the return, and skipping it can forfeit millions in exemption for the survivor.

Late Portability Elections

If the deadline passed without the election, there may still be time. Under Revenue Procedure 2022-32, an estate that was not otherwise required to file a federal estate tax return has up to five years from the date of death to file a late Form 706 solely to elect portability. Write “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)” at the top of the first page. This relief covers only estates below the filing threshold; estates that were required to file are bound by the standard nine-month deadline and the six-month extension.

What Portability Does Not Cover

Portability applies to the estate and gift tax exemption. It does not carry over to the generation-skipping transfer tax exemption. If you plan to leave assets to grandchildren or later generations, the first spouse’s GST exemption is lost unless it was allocated during life or through a properly structured trust. Couples with multi-generational goals often use bypass trusts alongside portability rather than relying on portability alone.

Generation-Skipping Transfer Tax

The generation-skipping transfer tax is a separate 40% tax on transfers to someone more than one generation below you, such as a grandchild.³ Without it, wealthy families could bypass a layer of estate tax by passing assets directly from grandparent to grandchild.

The GST exemption matches the estate exemption at $15 million per person in 2026, and it is indexed for inflation going forward. Each spouse has their own $15 million, and any unused portion at death disappears. Allocating GST exemption when funding trusts is one of the more technical parts of estate planning, and errors are costly because the 40% GST tax can stack on top of the regular estate tax.

Step-Up in Basis for Inherited Assets

The exemption is only half the picture. When someone inherits property, the cost basis resets to fair market value on the date of death.⁶ If your parent bought stock for $50,000 and it was worth $500,000 at death, your basis is $500,000. Sell it the next day at that price and you owe no capital gains tax. The $450,000 in appreciation leaves the tax system entirely.

The step-up applies only to property that passes at death. Gifts made during life carry the donor’s original basis. In the same example, if your parent gave you the stock while alive, your basis stays at $50,000 and selling for $500,000 triggers a $450,000 gain. For highly appreciated assets, holding until death can produce a larger tax savings than the gift tax exemption itself, which is why some planners advise against lifetime transfers of appreciated property even when the exemption would easily absorb the gift.

A few categories are excluded from the step-up. Retirement accounts such as IRAs and 401(k)s, annuities, and U.S. savings bond interest are treated as income in respect of a decedent and retain their built-in tax liability. There is also a rule denying the step-up for appreciated property gifted to the decedent within a year of death and then passed back to the original donor or their spouse.⁶ That rule blocks the maneuver of handing appreciated stock to a dying relative and inheriting it back with a fresh basis.

State Estate and Inheritance Taxes

Clearing the federal exemption does not clear you at the state level. Roughly a dozen states and the District of Columbia impose their own estate tax, and a handful of states levy an inheritance tax paid by the recipient. State exemptions can start as low as $1 million. An estate worth $5 million might owe nothing federally and still face a real bill in the state where the decedent lived or owned property. The federal increase does not change state exposure, so anyone with property in multiple states, or in a state with its own estate or inheritance tax, should account for those liabilities separately.

Filing the Estate and Gift Tax Returns

Form 706, the estate tax return, is due nine months after the date of death. Form 4768 requests an automatic six-month extension, though estimated tax owed must still be paid by the original due date. Form 709, for lifetime gifts, is due April 15 of the year following the gift.⁷

Form 706 requires fair-market-value appraisals of every asset in the estate as of the date of death.⁸ Real estate, closely held business interests, and unusual property like art or collectibles usually need professional appraisals. The return also requires a full history of the decedent’s prior taxable gifts, reconciled with any Form 709 returns they filed. Appraisals and gift-tax records take the most time, and executors who start early tend to avoid the last-minute extension.

After the IRS processes Form 706, you can request an estate tax closing letter confirming acceptance of the return. The letter is not automatic. You request it through Pay.gov and pay a $56 user fee, and the IRS advises waiting at least nine months after filing before submitting the request.⁹ Many title companies and financial institutions want to see the closing letter before releasing assets to beneficiaries, so skipping it can create practical delays even when no tax was owed.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
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 2001 – Imposition and Rate of Tax
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
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Internal Revenue Service. Estate and Gift Tax FAQs
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Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent
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Internal Revenue Service. Filing Estate and Gift Tax Returns
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Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
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Internal Revenue Service. Frequently Asked Questions on the Estate Tax Closing Letter