United States Estate Tax: Exemption, Form 706, and Portability

The federal estate tax is a tax on wealth transferred at death, and for anyone dying in 2026 it only applies to estates worth more than $15 million.¹ The estate pays the tax before anything reaches heirs, and the executor is legally responsible for filing the return and settling the bill. Fewer than one in a thousand estates owe it, but for those that do, rates run as high as 40 percent and the filing rules are unforgiving.

The $15 Million Exemption

Every U.S. citizen or resident gets a basic exclusion amount that shelters part of the estate from tax. For 2026, that amount is $15 million.² If your gross estate plus any taxable gifts you made during your lifetime stays under that figure, the estate owes nothing and generally does not need to file a return.¹

The threshold was set by the One, Big, Beautiful Bill Act, signed on July 4, 2025, which replaced the temporary increase scheduled to expire at the end of 2025 under the Tax Cuts and Jobs Act. The $15 million figure is permanent, with no built-in sunset date, and it will be indexed for inflation starting in 2027.³ For a married couple, up to $30 million can pass free of federal estate tax.

The exemption works through a unified credit that offsets the calculated tax dollar for dollar. The IRS computes what the tax would be on your entire taxable estate, then subtracts the credit. If the credit covers the full amount, tax is zero. This is the same credit that applies to taxable gifts made during your lifetime, which is why lifetime gifts reduce the exemption available at death.

What Counts as the Gross Estate

The gross estate is the broadest possible picture of what someone owned or controlled at death. It includes every property interest, tangible or intangible, wherever located: real estate, vehicles, bank accounts, investment portfolios, business interests, personal property, and anything else with monetary value.⁴ It goes well beyond what most people think of as their stuff.

Life insurance proceeds are included if the deceased owned the policy or held any control over it at death, even if the payout went directly to a named beneficiary.⁵ A common planning move is to transfer a policy to an irrevocable trust so the proceeds stay outside the estate. That strategy fails if the person dies within three years of the transfer, because the policy gets pulled back in.⁶

Annuities and survivor benefits are counted if the deceased was receiving payments or had the right to receive them before death.⁷ Lifetime transfers where the deceased kept some control or retained a right to the income also get swept back in. The underlying principle is straightforward: if you benefited from it or could direct what happened to it, it is part of your estate.

How Estate Assets Are Valued

Every asset in the gross estate is valued at fair market value, meaning the price a knowledgeable buyer and seller would agree to in an arm’s-length transaction. Publicly traded stocks and bonds are typically valued at the average of the high and low trading prices on the date of death. Real estate, closely held businesses, collectibles, and other hard-to-price assets require professional appraisals that meet IRS standards and explain the methodology used.

The default valuation date is the date of death, but the executor can elect an alternate date six months later.⁸ The election is only available when it reduces both the total estate value and the tax owed. If markets drop after the death, the alternate date can save the estate a significant amount. Property sold or distributed within that six-month window is valued as of the date it changed hands rather than the six-month mark.

Deductions That Reduce the Taxable Estate

The taxable estate is what remains after allowable deductions are subtracted from the gross estate.⁹ For many estates, deductions are what bring the final number below the exemption threshold.

Assets passing to a surviving spouse who is a U.S. citizen are fully deductible under the marital deduction, with no dollar limit. This effectively defers all estate tax until the second spouse dies.
Anything left to a qualifying nonprofit or religious organization is fully deductible.
Outstanding loans, credit card balances, and mortgages owed at death reduce the estate’s value.
Burial costs, legal fees, executor commissions, and accounting fees incurred in settling the estate are deductible.

The marital deduction has a critical limitation for non-citizen spouses. If the surviving spouse is not a U.S. citizen, the unlimited marital deduction is denied unless the assets pass through a qualified domestic trust, or QDOT. The trust must have at least one U.S. citizen or domestic corporation as trustee with authority to withhold estate tax on any distribution of principal.¹⁰ Failing to use a QDOT means losing the marital deduction entirely, which can trigger an immediate and substantial tax bill. The executor must elect QDOT treatment on the estate tax return, and the election is irrevocable.

How the Tax Is Calculated

The estate tax uses graduated rates that start at 18 percent on the first $10,000 of the taxable amount and climb through a series of brackets until reaching a top rate of 40 percent on everything above $1 million.¹¹ The lower brackets are academic for most taxable estates. Because the unified credit already shelters the first $15 million, any estate that actually owes tax is paying 40 percent on the excess.

The calculation runs in two steps. First, a tentative tax is computed on the sum of the taxable estate and any adjusted taxable gifts made during the person’s lifetime. Second, the unified credit and any gift tax already paid on those lifetime transfers are subtracted. The result is the net estate tax owed.

The estate tax and the gift tax operate as a single unified system. Every dollar of exemption used during life to shelter taxable gifts is a dollar not available at death. Not every gift counts, though. You can give up to $19,000 per recipient in 2026 without filing a gift tax return or touching your lifetime exemption.² Married couples can combine annual exclusions for $38,000 per recipient. Tuition paid directly to an educational institution and medical expenses paid directly to a provider are excluded from gift tax entirely, regardless of amount.

Portability Between Spouses

When the first spouse dies without using the full $15 million exemption, the leftover portion can transfer to the surviving spouse. This is called the deceased spousal unused exclusion, or DSUE, and the survivor can stack it on top of their own exemption at their later death.³

Portability is not automatic. The executor of the first spouse’s estate must file a complete Form 706, even if the estate owes no tax, by the filing deadline of nine months after death plus any extension.¹² Missing it can mean the permanent loss of millions of dollars in tax shelter.

For estates not otherwise required to file, the IRS provides a safety valve. Under Revenue Procedure 2022-32, the executor can file a late Form 706 to elect portability up to five years after the date of death, with a statement at the top indicating it is filed under that revenue procedure.¹³ The relief only applies to estates that were not otherwise required to file. If the estate exceeded the filing threshold, the normal deadline governs.

Filing Form 706

The federal estate tax return is IRS Form 706, filed within nine months of the date of death.¹⁴ Executors can request an automatic six-month extension by filing Form 4768 before the original deadline. An extension gives more time to organize paperwork, but does not extend the deadline for paying the tax. Interest accrues on any unpaid balance from the original nine-month mark.

The form is extensive. The executor needs the decedent’s Social Security Number, a death certificate, and a full inventory of every asset. Assets are reported on a series of schedules covering real estate, stocks and bonds, cash and notes, life insurance, jointly owned property, other property, lifetime transfers pulled into the estate, powers of appointment, and annuities. Deductions go on separate schedules for administration expenses and for debts.¹² Every entry needs a description, valuation date, and appraised value, with supporting documentation organized to match. The return is filed by mail to the IRS service center listed in the Form 706 instructions; certified mail with a return receipt is a smart way to prove the filing date.

Paying the Tax

Payment can be made through the Electronic Federal Tax Payment System (EFTPS) or by mailing a check with the return. Most large estates use the electronic system for speed and a clear transaction record.

Estates where a closely held business makes up more than 35 percent of the adjusted gross estate can elect to pay the portion of tax attributable to that business in installments over up to 14 years. The executor can defer the first payment for up to five years, paying only interest during that period, then make up to ten annual installments.¹⁵ A qualifying business includes a sole proprietorship, a partnership with 45 or fewer partners (or where the estate holds at least 20 percent of the capital), and a corporation with 45 or fewer shareholders (or where the estate holds at least 20 percent of the voting stock). The election must be made on the timely filed return.

Penalties for Late or Understated Returns

Missing the filing deadline without reasonable cause triggers a penalty of 5 percent of the unpaid tax for each month the return is late, up to 25 percent.¹⁶ The failure-to-pay penalty runs separately at 0.5 percent per month, also capping at 25 percent. Both stack, and interest accrues on top. If the failure to file is found to be fraudulent, the monthly rate rises to 15 percent, with a 75 percent ceiling.

Valuation errors carry their own risk. If the IRS determines an asset was reported at 65 percent or less of its true value, a 20 percent accuracy penalty applies to the resulting underpayment.¹⁷ The penalty doubles to 40 percent if the reported value was 40 percent or less of the correct figure. The 20 percent penalty applies only when the underpayment attributable to the valuation error exceeds $5,000, but past that line the consequences are steep. Professional appraisals from qualified appraisers are the best defense.

Step-Up in Basis for Heirs

One of the most valuable features of the system has nothing to do with the estate tax itself. When someone inherits property, the tax basis of that property resets to fair market value at the date of the decedent’s death.¹⁸ This step-up eliminates capital gains tax on all appreciation that occurred during the decedent’s lifetime.

If your parent bought stock for $50,000 and it was worth $500,000 at death, your basis is $500,000. Sell it for $510,000 and you owe capital gains tax on $10,000, not on the $460,000 of appreciation your parent experienced. For families with highly appreciated real estate or long-held investments, this feature can be worth far more than the estate tax exemption.

One constraint: if the asset was reported on an estate tax return, the heir’s basis cannot exceed the value reported on that return.¹⁸ The IRS requires consistency between the estate tax valuation and the income tax basis. An executor who undervalues an asset to reduce estate tax cannot later claim a higher basis for the heir’s capital gains purposes.

Generation-Skipping Transfer Tax

A separate tax applies to transfers that skip a generation, such as a grandparent leaving assets directly to a grandchild. The generation-skipping transfer tax (GSTT) closes what would otherwise be a route around an entire layer of estate tax, imposing a flat rate equal to the top estate tax rate of 40 percent.¹⁹

The GSTT has its own exemption matching the estate tax exemption: $15 million for 2026.² Transfers within that exemption are not subject to the GSTT. For transfers above the exemption, the 40 percent GSTT stacks on top of the regular estate tax, which can consume a significant share of the assets being passed down.

State Estate Taxes

The federal estate tax is not the only one to plan around. A dozen states and the District of Columbia impose their own separate estate taxes, and the exemption thresholds are often far lower than the federal level. Some states begin taxing estates at just $1 million to $2 million, meaning an estate that owes nothing federally can still face a substantial state tax bill. State rates vary but can reach into the mid-teens. Anyone with assets in a state that imposes an estate tax should factor that into their planning regardless of whether federal tax is likely.

Getting the Estate Tax Closing Letter

After the IRS processes the return, the executor does not automatically receive confirmation that the tax liability is settled. The executor must request an estate tax closing letter through Pay.gov and pay a $56 user fee.²⁰ The request should not be submitted until at least nine months after the return was filed, unless the account transcript already shows the return has been accepted.²¹

The letter confirms the IRS has accepted the return and that the federal estate tax obligation is satisfied. Many probate courts require it before the executor can distribute remaining assets to beneficiaries, so it is a practical necessity even though it is no longer free. Skipping it can leave the estate in limbo and expose the executor to personal liability if the IRS later asserts a deficiency.

1
Internal Revenue Service. Estate Tax
2
Internal Revenue Service. What’s New – Estate and Gift Tax
3
Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
4
Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate
5
Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance
6
Office of the Law Revision Counsel. 26 USC 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death
7
Office of the Law Revision Counsel. 26 USC 2039 – Annuities
8
Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
9
Office of the Law Revision Counsel. 26 USC 2051 – Definition of Taxable Estate
10
Office of the Law Revision Counsel. 26 USC 2056A – Qualified Domestic Trust
11
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
12
Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
13
Internal Revenue Service. Revenue Procedure 2022-32
14
eCFR. 26 CFR 20.6075-1 – Returns; Time for Filing Estate Tax Return
15
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
16
Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
17
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
18
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
19
Office of the Law Revision Counsel. 26 USC 2641 – Applicable Rate
20
Internal Revenue Service. Estate Tax Closing Letter Fee Reduced to $56 Effective May 21, 2025
21
Internal Revenue Service. Frequently Asked Questions on the Estate Tax Closing Letter