Estate Planning and Taxes
Learn the estate tax exemption, the step-up in basis, and the tools that shrink a taxable estate.
TL;DR
- Shield up to
$15Mper person from federal estate tax in 2026. - Inherited assets get a
stepUpBasisthat erases lifetime gains. - Use
portability, gifting, and trusts to shrink a taxable estate.
Estate Tax Basics
The ExemptionAssets under this amount pass free of federal estate tax.
$15,000,000 per person (2026)Top RateOnly the amount above the exemption is taxed.
Up to 40% on the excessPortabilityA spouse can inherit the other's unused exemption.
Up to $30M per coupleMade PermanentThe 2025 law locked in the high exemption for 2026 on.
No sunset to ~$7MStep-Up in Basis
Basis ResetsInherited assets reset to date-of-death value.
New basis = value at deathGains VanishLifetime appreciation is wiped out for the heir.
Sell soon = little or no gainNot for IRAsTraditional retirement accounts get no step-up.
Heirs pay income tax on IRACommunity PropertySome states step up both spouses' halves.
Full step-up on both halvesTrusts
RevocableFlexible and avoids probate, but stays in your estate.
Living trust: in the estateIrrevocableLocks assets away but removes them from the estate.
Out of estate, creditor-protectedILITKeeps life insurance proceeds out of the estate.
Life insurance trustSLATGifts to a trust your spouse can still draw from.
Spousal access trustShrink Your Estate
Annual GiftsGive $19,000 per person each year, out of the estate.
$19,000 x each recipientRemove Future GrowthGifting an asset also moves its later appreciation out.
Gift now, growth leaves tooCharitable TrustsGive appreciated assets, get income and a deduction.
CRT: income now, gift laterFix Your DomicileMoving can escape a state estate tax, if done fully.
License + vote + homeTips
- Hold highly appreciated assets until death rather than gifting them, so heirs get a fresh
stepUpBasisinstead of your old carryover basis. - Elect
portabilityon a timely Form 706 at the first spouse's death, even with no tax due, to preserve their unused exemption.
Warnings
- Traditional IRA and 401(k) balances get no
stepUp, so heirs pay ordinary income tax on every dollar they withdraw. - A dozen states levy their own
estateTaxat far lower exemptions, so a family clear of federal tax can still owe the state.
In Practice
Compare selling appreciated stock during life with passing it on at death.
Your parent bought stock for $50,000. It is now worth $500,000, and you will inherit it.
- If your parent sells now: gain of $500,000 - $50,000 = $450,000, taxed.
- Instead they hold it until death.
- You inherit with a stepped-up basis of $500,000.
- You sell right away at $500,000: gain of $0.
The step-up erases the tax on $450,000 of lifetime gain.
Highly appreciated assets are often best held until death for the step-up.
FAQ
Up to $15 million per person, or $30 million for a married couple using portability. The 2025 tax law made this higher exemption permanent starting in 2026. Only the amount above the exemption is taxed, at rates up to 40%, which is why only a tiny fraction of estates ever owe federal estate tax.
When you inherit an asset, its cost basis resets to the market value on the date of death. All the gain that built up during the original owner's life simply disappears for tax purposes. An heir can often sell right away with little or no capital gains tax, which makes it one of the most valuable breaks in the code.
It lets a surviving spouse add the deceased spouse's unused exemption to their own. A couple can shield about $30 million this way. But it is not automatic: the executor must elect it on a timely Form 706 after the first death, even when no estate tax is owed. Skip the filing and the unused exemption is lost.
A revocable (living) trust can be changed anytime and avoids probate, but it does not remove assets from your taxable estate. An irrevocable trust generally cannot be changed, but it moves assets out of the estate and can protect them from creditors. Estate-tax planning uses irrevocable trusts like ILITs and SLATs.