The federal estate tax affects only a small percentage of estates each year, but for those it does affect, the impact is substantial. Understanding the current exemption, the top rate, and the potential changes on the horizon is essential for anyone with significant assets doing long-term planning.
The 2026 Federal Estate Tax Exemption
For 2026, the federal estate tax exemption is $13,990,000 per person, up from $13,610,000 in 2025. This exemption is indexed for inflation. For a married couple, the combined exemption is effectively $27,980,000 if proper planning is in place (specifically, portability of the deceased spouse's unused exemption, known as DSUEA).
The estate tax applies only to the amount of an estate's taxable value that exceeds the exemption. An estate worth $15 million in 2026 would have a taxable estate of approximately $1,010,000 after applying the $13,990,000 exemption.
The Top Estate Tax Rate
The top federal estate tax rate is 40% on taxable estate value above the exemption. The rate structure is technically graduated but effectively reaches 40% quickly above the exemption threshold. For the $1,010,000 taxable estate in the example above, the estate tax bill would be approximately $404,000.
In addition to federal estate tax, some states impose their own estate or inheritance taxes with lower exemption thresholds. Massachusetts and Oregon, for example, have state estate tax exemptions as low as $1 million.
The Marital and Charitable Deductions
Two deductions can significantly reduce the taxable estate:
Unlimited marital deduction. Assets passed to a surviving U.S. citizen spouse are fully deductible from the gross estate, meaning no estate tax is owed on those transfers regardless of amount. The estate tax is deferred, not eliminated -- it becomes due on the surviving spouse's estate, offset by their own exemption and any DSUEA from the first spouse.
Charitable deduction. Assets left to qualifying charities are fully deductible from the gross estate. Charitable bequests can reduce or eliminate estate tax for estates with philanthropic goals.
Portability: The DSUEA
The Deceased Spouse's Unused Exemption Amount (DSUEA) allows a surviving spouse to inherit any unused portion of the deceased spouse's estate tax exemption. For a couple where the first spouse dies with a $5 million estate in 2026 (using $5 million of the $13,990,000 exemption), the surviving spouse can inherit the unused $8,990,000, adding it to their own $13,990,000 exemption for a total of $22,980,000.
Portability is not automatic -- the estate of the first spouse must file a federal estate tax return (Form 706) within nine months of death (15 months with extension) to elect portability, even if no estate tax is owed.
Annual Gift Tax Exclusion
One key planning tool that works alongside the estate tax is the annual gift tax exclusion. In 2026, each person can give up to $19,000 per recipient per year without the gift counting against their lifetime exemption. A couple can combine exclusions to give $38,000 per recipient per year. Consistent annual gifting over many years can meaningfully reduce a taxable estate without using any lifetime exemption.
The One Big Beautiful Bill and Estate Tax
The One Big Beautiful Bill Act, signed in 2025, made the elevated estate tax exemption permanent rather than allowing it to revert to approximately $7 million per person as the original TCJA sunset provisions would have required. Under current law following OBBBA, the $13.99 million (2026) exemption continues in future years with inflation adjustments. This removes the planning urgency that existed prior to OBBBA passage, when advisors were recommending accelerated gifting before a potential 2026 exemption reduction.
Who Needs Estate Tax Planning
With the exemption at $13.99 million per person, the vast majority of Americans will never owe federal estate tax. IRS statistics consistently show that fewer than 0.2% of estates pay federal estate tax in any given year. However, estate planning remains important for reasons beyond federal estate tax: state estate taxes (which have lower exemptions), income tax planning for inherited assets, probate avoidance, and ensuring assets pass to intended beneficiaries efficiently.
For estates approaching or exceeding $14 million per person, strategies such as irrevocable trusts, qualified personal residence trusts (QPRTs), grantor retained annuity trusts (GRATs), and charitable remainder trusts can reduce the taxable estate while achieving other planning goals.
Step-Up in Cost Basis
One significant tax benefit for inherited assets is the step-up in cost basis. When someone inherits an asset, the cost basis for capital gains purposes is reset to the fair market value at the date of the decedent's death. This means capital gains that accrued during the decedent's lifetime are effectively forgiven. For heirs inheriting appreciated stock or real estate, this can eliminate hundreds of thousands of dollars in capital gains tax that would have applied if the decedent had sold the assets during their lifetime.
The step-up in basis applies to assets in taxable accounts. IRAs and other retirement accounts do not receive a step-up -- inherited retirement accounts are taxed as ordinary income when distributions are taken, under rules that generally require full distribution within 10 years for most non-spouse beneficiaries (under the SECURE Act).
Learn More
The 2026 EITC, AMT, and Estate Tax Updates guide covers the inflation adjustments for 2026 across all three provisions. For capital gains planning that intersects with estate strategies, see the Capital Gains Tax Rates 2026 guide.