What Is Estate Tax? 2026 Exemption, Rates, and Form 706

The estate tax is a federal levy on the transfer of a deceased person’s property, and in 2026 it applies only to estates worth more than $15 million per person. The tax comes out of the estate before anything reaches heirs, which is what separates it from an inheritance tax paid by the people receiving assets. The top federal rate is 40%, but the high exemption, unlimited deductions for debts and spousal transfers, and portability rules for married couples together mean fewer than 1% of estates owe anything at the federal level. A dozen states run their own estate taxes at much lower thresholds, so a family that owes nothing to the IRS can still owe a state.

The 2026 Exemption and Tax Rates

The federal exemption for 2026 is $15 million per person. That figure comes from the One, Big, Beautiful Bill Act, signed on July 4, 2025, which permanently raised the basic exclusion amount and indexed it for inflation starting in 2027.¹ The temporary increase under the Tax Cuts and Jobs Act had been scheduled to revert to roughly $7 million. The sunset never happened.

Only the portion of an estate above $15 million is taxed. Rates are graduated, starting at 18% on the first dollars over the exemption and climbing to 40% once the taxable amount runs more than $1 million past it.² A married couple using portability can shield up to $30 million combined, which puts the estate tax in ultra-high-net-worth territory for most families.

What Counts as Part of the Estate

The gross estate includes everything the deceased owned or held a legal interest in at death. Federal law sweeps broadly: real estate, bank accounts, investment portfolios, business interests, retirement accounts, vehicles, jewelry, and certain assets the person transferred during life all get counted.³ Assets are valued at fair market value on the date of death, not what the deceased paid for them. A house bought for $200,000 that’s worth $1.2 million at death goes on the return at $1.2 million.⁴

Life insurance is the asset that catches the most families off guard. If the deceased owned a policy on their own life or held any control over it, such as the right to change beneficiaries, borrow against the cash value, or cancel it, the full death benefit is part of the estate. That’s true even when the proceeds go directly to a named beneficiary and never pass through probate.⁵ Transferring ownership to an irrevocable life insurance trust at least three years before death is the standard way to keep it out.

Property given away during life can also be pulled back in. If someone deeded a house to a child but kept living there rent-free, or transferred investment assets while retaining the right to collect dividends, the IRS treats those assets as still part of the estate.⁴ The same applies to property in a revocable trust, since the person who set it up retained the power to change or revoke it.

If the market drops after death, the executor can elect an alternate valuation date six months out. The election is only available when it would reduce both the gross estate and the tax owed, and it applies to all assets rather than a chosen few.⁶

Deductions That Reduce the Taxable Estate

The taxable estate is the gross estate minus allowable deductions. Four categories do most of the work:

Property left to a surviving spouse who is a U.S. citizen passes entirely tax-free, with no dollar limit. If the spouse is not a citizen, the deduction requires a qualified domestic trust.⁷
Bequests to qualifying charities, religious organizations, educational institutions, veterans’ groups, and government entities are fully deductible with no cap.⁸
Funeral costs, executor fees, attorney and accounting fees, and court costs are deductible when allowable under the state’s probate rules.⁹
Unpaid mortgages, credit card balances, medical bills, and other legitimate debts owed at death reduce the taxable value. The full property is reported in the gross estate, with the debt claimed separately.⁹

The marital deduction is the most powerful of these because it’s unlimited. A person with a $50 million estate can leave everything to a citizen spouse and owe zero federal tax. The trade-off is that those assets then sit in the surviving spouse’s estate, so the question is deferred rather than eliminated.

Portability for Married Couples

Portability lets a surviving spouse inherit whatever portion of their deceased partner’s $15 million exemption went unused. If the first spouse dies with a $6 million estate, the remaining $9 million transfers to the survivor, giving them a combined $24 million exemption. Where neither spouse has made taxable gifts, the full $30 million passes to the survivor.²

Portability does not happen automatically. The executor of the first spouse’s estate must file Form 706 and affirmatively elect it, even when the estate is well below the filing threshold and owes no tax.¹⁰ Skipping this filing is one of the most common and costly mistakes in estate planning, because there’s no way to claim the exemption later without the return on record.

Estates that missed the normal deadline but weren’t otherwise required to file can use a simplified late-election method. Under Revenue Procedure 2022-32, the executor has up to five years from the date of death to file Form 706 solely for portability.¹¹ Estates that were required to file because the gross estate exceeded the exemption don’t qualify for the simplified route.

Lifetime Gifts and the Shared Exemption

Estate and gift tax share a unified system. Lifetime gifts above an annual threshold eat into the same $15 million exemption used at death. The annual gift tax exclusion sits outside that math: for 2026, you can give up to $19,000 per recipient per year without filing a gift tax return or touching your lifetime exemption.¹ A married couple giving jointly can give $38,000 per recipient, and there’s no cap on the number of recipients in a single year.

Gifts above $19,000 to a single recipient aren’t taxed on the spot. They’re reported on Form 709 and subtracted from the donor’s $15 million lifetime exemption. No actual gift tax comes due until cumulative taxable gifts exceed the full exemption. Direct payments for someone’s tuition or medical bills don’t count against either limit, as long as the payment goes to the institution rather than to the recipient.

Filing Form 706

An executor must file Form 706 if the gross estate of a U.S. citizen or resident, plus adjusted taxable gifts made after 1976, exceeds the basic exclusion amount, which is $15 million for deaths in 2026.¹² Estates below that threshold still need to file if the executor wants to elect portability.¹⁰

Form 706 runs over 30 pages and demands a level of detail that surprises most executors. Every asset must be listed at fair market value with supporting documentation. Real estate needs a legal description and an appraisal. Business interests require five years of financial statements. A certified death certificate and the will (if one exists) must be attached.¹³

The return is due nine months after the date of death.¹⁴ An automatic six-month filing extension is available through Form 4768, but here’s the catch: the extension gives more time to file the paperwork, not to pay the tax. An estate that expects to owe needs to estimate and pay by the nine-month mark even if the finished return arrives months later.

Missing the deadline triggers a penalty of 5% of the unpaid tax for each month the return is late, up to 25%.¹⁵ A separate late-payment penalty of 0.5% per month runs until the balance clears.¹⁶ When both apply in the same month, the filing penalty is reduced by the payment penalty amount, so the combined hit is 5% per month rather than 5.5%. Interest accrues on top of everything. For a large estate, a few months of delay can cost hundreds of thousands of dollars.

State Estate and Inheritance Taxes

Federal isn’t the whole picture. Twelve states and the District of Columbia impose their own estate taxes with exemptions far lower than $15 million. State exemptions range from $1 million to roughly $13.6 million, and rates generally run between 0.8% and 16%, with two states topping out at 20%. An estate worth $4 million might owe nothing to the IRS yet face a significant state bill. Both the state where the deceased was domiciled and any state where they owned real property may assert a claim.

Several of these states decoupled from the federal estate tax after 2001, when Congress began raising the federal exemption. Rather than tracking the federal number up, they froze their thresholds at lower levels. That gap is why state exposure now sits so far below federal exposure.

Five states impose an inheritance tax instead, which works differently. Rather than taxing the estate as a whole, it falls on each beneficiary based on their relationship to the deceased. Spouses and children pay lower rates or nothing; more distant relatives and unrelated beneficiaries pay more. One state imposes both an estate tax and an inheritance tax, and an estate in that state has to plan around both obligations.

Special Situations

Family Businesses and Farms

Estates heavy on business value and light on cash face a practical problem: the tax bill can come due before the business generates the cash to cover it. If a closely held business interest makes up more than 35% of the adjusted gross estate, the executor can elect to pay the tax attributable to that business in installments over up to 14 years.¹⁷ Only interest is due for the first five years, followed by up to ten annual installments of the tax itself. A “closely held business” here means a sole proprietorship, a partnership with 45 or fewer partners (or where the estate owns at least 20% of the capital), or a corporation with 45 or fewer shareholders (or where the estate owns at least 20% of the voting stock). The provision exists so that a family farm or business doesn’t have to be sold at a fire-sale price to satisfy the IRS.

Transfers That Skip a Generation

The generation-skipping transfer tax (GSTT) applies when assets pass to someone two or more generations below the deceased, such as a grandchild. Without it, wealthy families could skip an entire generation of estate tax by leaving assets directly to grandchildren. The GSTT imposes a flat tax equal to the top estate tax rate (40% in 2026) on top of any regular estate tax owed.¹⁸ It has its own exemption, which for 2026 matches the estate tax figure at $15 million per person.¹

Non-Resident Aliens

Non-citizens who were not U.S. residents at death face estate tax only on property located in the United States, primarily real estate and tangible personal property. The exemption is much lower: $60,000, compared to the $15 million available to citizens and residents.¹² Rates follow the same graduated schedule, topping out at 40%. Estate tax treaties with certain countries can modify these rules, sometimes providing a proportional share of the full exemption based on the ratio of U.S. assets to worldwide assets. Anyone with foreign relatives who own U.S. real estate or significant U.S. investments should check the applicable treaty before assuming the standard rules apply.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
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Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
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Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate
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eCFR. 26 CFR 20.2031-1 – Definition of Gross Estate; Valuation of Property
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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 2032 – Alternate Valuation
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Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to 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 2053 – Expenses, Indebtedness, and Taxes
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Internal Revenue Service. Instructions for Form 706 (09/2025)
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Internal Revenue Service. Revenue Procedure 2022-32
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Office of the Law Revision Counsel. 26 USC 6018 – Estate Tax Returns
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Internal Revenue Service. Instructions for Form 706 (Rev. September 2025)
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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. Failure to File Penalty
16
Internal Revenue Service. Failure to Pay Penalty
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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 USC 2641 – Applicable Rate