Estate Planning and Taxes
Estate tax thresholds, step-up in basis, trusts, and the strategies that reduce estate tax exposure.
TL;DR
- 01The federal estate tax exemption is $15 million per person in 2026.
- 02Inherited assets receive a step-up in basis, erasing prior capital gains.
- 03Trusts, annual gifting, and charitable strategies can shrink a taxable estate.
Tips
- 01Highly appreciated assets are often best held until death rather than gifted during life, because gifting transfers your original (carryover) basis to the recipient.
- 02Gifts of interests in family limited partnerships or LLCs can be valued at a 20-35% discount for gift tax purposes.
Warnings
- 01The OBBBA made the higher exemption permanent, but estates near the $15 million threshold should still plan for future legislative changes.
- 02Assets in a traditional IRA or 401(k) never receive a step-up in basis, so heirs owe ordinary income tax on withdrawals.
- 03Changing your state of domicile requires more than owning a home — update your voter registration, license, and primary residence too.
Federal Estate Tax Basics
The federal estate tax applies to the total value of assets transferred at death that exceed the exemption threshold. The tax rate on the excess reaches 40%. Because the exemption is high, only about 0.2% of estates owed federal estate tax in recent years.
| Filing Status | 2026 Exemption | Top Rate |
|---|---|---|
| Individual | $15,000,000 | 40% |
| Married couple (portability) | $30,000,000 | 40% |
Portability lets a surviving spouse inherit the deceased spouse's unused exemption by filing a timely estate tax return (Form 706), even if no tax is owed. The Tax Cuts and Jobs Act (TCJA) doubled exemptions in 2017, and the One Big Beautiful Bill Act, signed July 2025, made the higher exemption permanent starting in 2026 rather than letting it sunset back to roughly $7 million per person.
Step-Up in Basis Explained
When an asset is inherited, its cost basis is stepped up (or occasionally stepped down) to its fair market value on the date of death. This eliminates the capital gains tax on all appreciation that occurred during the decedent's lifetime.
- Example: You paid $50,000 for stock now worth $500,000. If you sell it, you owe capital gains on $450,000. If you hold it until death, your heir inherits it with a $500,000 basis — zero taxable gain.
- Community property states offer a full step-up on both halves of community property, not just the decedent's share — a significant advantage over common-law states.
- Assets held in a traditional IRA or 401(k) do NOT receive a step-up in basis; heirs pay ordinary income tax on withdrawals.
Revocable vs Irrevocable Trusts
Trusts are legal entities that hold assets according to instructions set by the grantor. The key estate-tax distinction is whether the trust is revocable or irrevocable.
| Feature | Revocable Trust | Irrevocable Trust |
|---|---|---|
| Removes assets from estate | No | Yes |
| Grantor can change or dissolve | Yes | Generally no |
| Avoids probate | Yes | Yes |
| Asset protection from creditors | No | Yes (if structured correctly) |
| Common types | Living trust | ILIT, SLAT, GRAT, QPR Trust |
An Irrevocable Life Insurance Trust (ILIT) removes life insurance proceeds from the taxable estate. A Spousal Lifetime Access Trust (SLAT) allows one spouse to gift assets to an irrevocable trust while the other spouse retains access to distributions.
Gifting Strategies to Reduce Your Estate
Systematic gifting during life is one of the most effective estate tax reduction tools. Every dollar removed from your estate today also removes all future appreciation on that dollar.
- Annual exclusion gifts: $19,000 per recipient in 2026 ($38,000 with gift splitting). A couple with 4 children and 8 grandchildren can move $456,000 out of the estate per year with zero tax.
- Grantor Retained Annuity Trust (GRAT): Transfer appreciating assets into a trust; receive annuity payments back; excess growth passes to heirs tax-free.
- 529 superfunding: Front-load 5 years of contributions ($190,000 per beneficiary for a couple) immediately.
- Charitable Remainder Trust (CRT): Donate appreciated assets, receive an income stream, and reduce the taxable estate while generating a charitable deduction.
State Estate Taxes
Twelve states and the District of Columbia impose their own estate or inheritance taxes, often with exemptions far lower than the federal level. Some states also have inheritance taxes, which are paid by the heir rather than the estate.
| State | Tax Type | Exemption (approx.) | Top Rate |
|---|---|---|---|
| Massachusetts | Estate | $2,000,000 | 16% |
| Oregon | Estate | $1,000,000 | 16% |
| Maryland | Estate + Inheritance | $5,000,000 estate | 16% / 10% |
| Pennsylvania | Inheritance only | None | 15% (non-relatives) |
| Washington | Estate | $2,193,000 | 20% |
Changing your state of domicile to a state with no estate or inheritance tax (e.g., Florida, Texas, Nevada) is a legitimate and often significant planning move for large estates. Proper domicile establishment requires more than owning a home — you must change voter registration, driver's license, and primary residence.
FAQ
The federal estate tax applies to the total value of assets transferred at death that exceed the exemption threshold. The tax rate on the excess reaches 40% .
Assets inherited through an estate receive a step-up in basis, eliminating capital gains tax on appreciation during the decedent's lifetime. This means heirs can sell inherited assets immediately with little to no taxable gain.
Portability lets a surviving spouse inherit the deceased spouse's unused federal estate tax exemption by filing a timely Form 706, even if no tax is owed. This effectively doubles the exemption available to a married couple in 2026. Without electing portability, the unused exemption is lost at the first spouse's death.
A revocable trust can be changed or dissolved by the grantor and avoids probate, but it does not remove assets from the taxable estate. An irrevocable trust generally cannot be changed, but it removes assets from the estate and can offer creditor protection. Common irrevocable structures include the ILIT for life insurance and the SLAT for spousal access to gifted assets.
You can give up to 19,000 dollars per recipient in 2026 without filing a gift tax return, or 38,000 dollars per recipient with gift splitting between spouses. Gifts above this annual exclusion reduce your lifetime exemption rather than triggering immediate tax. Medical and education expenses paid directly to the provider or institution do not count toward this limit.